Secured Vs Unsecured Loans

If you’re looking for a loan, there are two main types to choose from: secured and unsecured loans. Choosing the right option can significantly impact your finances, so it’s important to know the pros, cons, and key differences.

Whether borrowing for a large purchase, consolidating debt, or covering unexpected expenses, knowing which loan type suits your needs can save you money and stress.

Key takeaways

Secured loans are tied to an asset, such as a home or car, offering lower interest rates but putting your assets at risk if you default.
Unsecured loans are based on creditworthiness, making them quicker to access but often with higher interest rates.
Secured loans typically allow you to borrow larger amounts, while unsecured loans are better for smaller borrowing needs.
Secured loans are easier to get with poor credit if you have assets, whereas unsecured loans often require a stronger credit profile.
Often individuals choose secured loans for significant, long-term expenses and unsecured loans for smaller, more immediate financial needs.

What is a secured loan?

A secured loan is a loan that is backed by an asset you own, like property, a car, or a savings account. This collateral acts as security for the lender, protecting them if you cannot repay the loan.

Secured loans are usually for high-value purchases or expenses, such as buying a home or car or carrying out extensive home improvement projects.

Lenders typically offer lower interest rates and high loan amounts because the loan is tied to an asset. However, this means that your assets will be at risk if you’re unable to keep up with your repayments.

Types of secured loans

Secured loans can be used for various purposes, and there are products designed for specific purchases. Common types of secured loans include:

Mortgages
Home equity line of credit (HELOC)
Auto loans
Secured credit cards
Secured personal loans

Some secured loans, like mortgages or auto loans, use what you’re buying as collateral. Other types use something you already own as security.

How do secured loans work?

The application process for secured loans is often longer and more detailed than other types of borrowing.

Mortgages and home loans, for example, involve an in-depth review of your finances, credit history, employment, and valuation of the property you’re purchasing or refinancing. For this reason, a secured loan’s underwriting decision can sometimes take several weeks to receive.

What you can borrow will be influenced by the value of the collateral- if you’re borrowing against your home, for example, you’ll be able to borrow up to a certain percentage of the available equity.

Once you have received a secured loan, it will be repaid in fixed installments over a set period. As they can be for large sums, many secured loans are paid back over several years.

If you cannot repay the loan during the term, the lender can take possession of the collateral, though there are legal notices and processes that the lender must follow before taking your collateral, which should be described in your loan agreement. They can then use it to recoup the outstanding balance of the loan.

Pros and cons of secured loans

Pros of secured loans

Lower interest rates: The added security for the lender means they can offer lower interest rates for secured loans compared to unsecured loans.
Higher loan amounts: With collateral in place, lenders are more willing to approve larger loan amounts, making secured loans ideal for big expenses like buying a home.
Longer terms: Secured loans are often available with extended repayment periods, giving you more flexibility to manage your monthly repayments.
Available with poor credit: As the collateral reduces the lender’s risk, secured loans are more accessible if you have less-than-perfect credit.

Cons of secured loans

Assets at risk: If you cannot make your repayments, the lender has the right to repossess the secured asset, such as your car or property.
Long application process: Assessing the value of collateral can make the application and approval process longer than for unsecured loans.
You need assets to apply: You can only be eligible for a secured loan if you have an acceptable asset to pledge as collateral.
Higher overall costs: As you borrow over a longer period, a secured loan can cost more in interest overall, even if the interest rate is lower than a personal loan.

What is an unsecured loan?

An unsecured loan is a type of borrowing that does not require collateral, which means your assets aren’t at risk if you default. Approval for an unsecured loan is often based on your credit record, income, and financial history.

As the lender is exposed to more risk without the security of collateral, unsecured loans usually have higher interest rates, lower borrowing limits, and shorter repayment terms than secured loans.

Unsecured loans are often used for smaller or medium-sized expenses, like funding home improvements, consolidating debt, or covering emergency costs. They provide flexibility but require careful management to avoid accumulating high-interest debt.

Types of unsecured loans

Unsecured loans are one of the most common ways to borrow money, and there are several different types available, including:

Personal loans
Student loans
Credit cards
Personal lines of credit
Payday loans

Any loan or form of borrowing you can get without putting down collateral can be considered an unsecured loan.

How do unsecured loans work?

When you apply for an unsecured loan, the lender will pay greater attention to your creditworthiness as there’s no collateral to reduce the risk.

Most unsecured loans will require a hard pull on your credit report to assess how likely you are to make the repayments. If you have a poor credit score, you may find it more difficult to get an unsecured loan.

Some lenders do offer personal loans with no credit check. This means you can still get an unsecured loan even if you have bad credit or no credit history.

Unsecured personal loans are typically paid in regular installments at a fixed interest rate, which means your payments will stay the same throughout the term.

Credit cards and lines of credit are revolving credit facilities. This means you can access funds when you need them and pay back when you can, though you will need to make a minimum payment every month.

Pros and cons of unsecured loans

Pros of unsecured loans

Assets not at risk: You don’t need to put forward any collateral, which means you’re not at risk of losing property or possessions if you default.
Faster approval: Unsecured loans can be approved more quickly than secured loans because there’s no need to assess and value collateral.
Flexibility of use: Unsecured loans usually have no restrictions, so they can be used for any purpose, from debt consolidation to emergency expenses.
Available with no assets: You can qualify for an unsecured loan if you are a renter or have no other significant assets like a car.

Cons of unsecured loans

Higher interest rates: Without collateral, lenders typically charge higher interest rates to offset the increased risk.
Lower borrowing limits: The absence of collateral typically means smaller loan amounts compared to secured loans.
Stricter eligibility: You may need a strong credit history and financial stability to qualify for the best unsecured loan rates and terms.
Shorter repayment terms: Unsecured loans usually have shorter repayment periods, which can lead to higher monthly repayments.

Differences between secured and unsecured loans

Feature	Secured loans	Unsecured loans
Collateral	Requires an asset as security, like a property or car	No collateral needed
Interest rates	Interest rates can be lower as risk is reduced	Interest can be higher as the risk is increased
Loan amounts	Higher loan amounts are available	Loan amounts are generally smaller
Application	Longer application process for asset assessment	Approval is faster, with fewer checks required
Eligibility	More readily available if you have poor credit	Stricter requirements, including a good credit score
Use of funds	Use may be restricted, e.g. for a car or home purchase only	Usually, there is no restriction on the use of funds

Should you get a secured or unsecured loan?

Deciding between a secured and unsecured loan depends on your financial situation, borrowing needs, and attitude to risk.

Both types of loans offer different benefits and drawbacks, so it’s important to consider your circumstances before making a choice.

When to consider a secured loan

A secured loan might be the right choice if:

You need a large loan amount: Secured loans can be available for as much as $500,000, and the limit for mortgages can be even higher.
You want lower interest rates: If keeping monthly payments as low as possible is your priority, the lower interest rates available on secured loans could help.
You have poor credit: You may find it easier to get a secured loan if you have a lower credit score, provided you have a suitable asset.
You need a longer repayment term: Secured loans often provide extended repayment periods, making them ideal for spreading the cost of a large, long-term financial commitment.

When to consider an unsecured loan

An unsecured loan may be more suitable if:

You don’t have collateral: If you’re a renter or don’t own a suitable asset like a car, unsecured loans may be your only option.
You need funds quickly: With faster approval processes and no need for valuation of your assets, unsecured loans can provide quicker access to money.
You only need a small loan: Unsecured loans are often ideal for short-term or smaller financial needs, like consolidating debt or covering an unexpected expense.
You don’t want to risk an asset: Without collateral at stake, unsecured loans reduce the risk of losing property if you cannot repay.

The choice between a secured and unsecured loan ultimately comes down to your financial situation.

Carefully consider the risks, benefits, and terms of each option. If you’re unsure, consulting a financial advisor or lender can help you make an informed decision tailored to your needs.

Secured vs Unsecured Loans