At a Glance

Taking out a personal loan can be necessary for many reasons, such as taking out a mortgage or financing student loans. But first, it’s important to know the differences between secured and unsecured personal loans. We’ll go deeper into each below, and explore their benefits and disadvantages:

Secured personal loans

Secured personal loans use property, such as a savings account, car, or certificate of deposit, as collateral. Secured personal loans are less common than unsecured loans, and are most often used by borrowers with poor credit who don’t qualify for unsecured loans.

Pros of secured loans

Secured loans are normally easier to obtain. For example, if you don’t have a good credit history, you can still get approved for a collateral loan. Secured loans also typically have higher borrowing limits, lower interest rates, and longer repayment terms.

Cons of secured loans

One big disadvantage of secured loans is risking your collateral if you default. If you can’t repay your loan, the lender can take your property. Another disadvantage of a secured loan is that it can only be used to buy a specific asset. An exception to this is a home equity loan.

Examples of secured personal loans

Examples of secured personal loans include:

  • Auto loans
  • Mortgages
  • Home equity loans
  • Home equity lines of credit (HELOC)

How to get a secured personal loan

To obtain a secured personal loan, you can head to a credit union, bank, or online lender that accepts collateral in exchange for a loan. Note that the process for obtaining a secured personal loan isn’t usually that fast, since the lender will need to take the time to assess the value of your collateral.

Can I get a secured loan with bad credit?

Yes. Unlike unsecured loans, secured personal loans are an option for people with bad credit.

What happens if you default?

If you default on a loan, the secured loan agreement allows the lender to take possession of your collateral without going to court. If the lender can’t sell your collateral for the total amount owed, you’ll be on the hook for the remainder of what’s left.

Unsecured personal loans

Unsecured personal loans do not require you to put up any type of property as collateral. Since creditors consider unsecured personal loans riskier than secured loans, higher interest rates are common.

Pros of unsecured loans

Unsecured loans are less risky for the borrower because you’re not putting personal property on the line. The application process is usually faster than applying for a secured loan. Unsecured loans also don’t have as many restrictions on what the money can be used for.

Cons of unsecured loans

Unsecured loans have higher interest rates because, without collateral as insurance, the lender takes on more risk. Unsecured loans can also be harder to obtain since you’ll need to prove you have a steady income and a good credit history.

Examples of unsecured personal loans

Examples of unsecured personal loans include:

  • Student loans
  • Personal lines of credit
  • Credit cards

How to get an unsecured personal loan

Unsecured personal loans are more common than secured loans, and are available at most credit unions, banks, or online lenders. Obtaining an unsecured loan through an online vendor can be quicker since you may be able to pre-qualify.

Can I get an unsecured loan with bad credit?

No. Your credit score is a major factor when the lender decides whether to approve you for an unsecured loan. If you have poor credit, you’re better off applying for a secured loan.

What happens if you default?

If you default on an unsecured loan, you can expect your credit score to take a hit. In addition, lenders can place your account into collections as well as seek legal recourse against you to make up for their losses. Collections and legal action can appear on your credit report for years after you’ve defaulted.

Personal loan application checklist


Personal loan application checklist

Armed with the right information, you’ll be able to compare rates and terms so you can choose the right personal loan and lender for you.