Personal loans can be secured or unsecured. In most cases, personal loans are unsecured, which means you don’t have to put up an asset as collateral. . However, unsecured loans may come with a higher interest rate, though secured loans have different types of risks. 

Learn more about secured vs unsecured loans and which one may be best for your financial situation.

Key takeaways:

• Secured personal loans require collateral, whereas unsecured loans don’t.
• Borrowers typically need a higher credit score to qualify for unsecured loans.
• Both secured and unsecured loans can be used for almost any purpose.

What are secured loans?

Secured loans are a type of loan where you’ll need to put up some form of collateral, or some type of asset. The idea is that you’re securing your loan to show the lender you have incentive to pay it back. Otherwise, the lender has the right to seize your property.

Lenders still take your credit score into consideration when you apply for a secured loan. 

There are some pros for this type of loan, such as less strict eligibility requirements, lower interest rates, and higher borrowing limits.

Examples of secured loans

Some common types of secured loans include:

• Auto loans: You use your car as collateral for this type or loan.
• Mortgages: Your home becomes your collateral.
• Home equity loans or HELOCs: This type of loan allows you to tap into your home equity to borrow funds.
• Secured credit cards: Issuers will ask that you put down a refundable cash deposit that acts as your credit limit.

Benefits of secured loans

Since you’re securing a loan with collateral, lenders may be willing to lend to borrowers with less than stellar credit scores. Secured loans may also have lower interest rates and higher borrowing limits depending on the type of loan. However, you may face longer approval times, especially if you’re taking out a mortgage, for example.

What are unsecured loans?

Unsecured loans don’t require any collateral, though you will need to pay interest and any closing costs lenders charge. Since you’re not putting down any assets to secure a loan, you may face more strict credit requirements and higher interest rates. In most cases, you can use secured loans for almost any purpose.

Examples of unsecured loans

Examples of unsecured loans are:

• Credit cards: Many credit cards don’t require you to put down a cash deposit.
• Personal line of credit: This type of loan means you’re approved up to a certain limit, and you can keep borrowing as long as you meet certain requirements.
• Personal installment loans: You receive one lump sum and you pay it back in monthly installments.
• Student loans: Private or Federal student loans are considered unsecured loans.

Benefits of unsecured loans

The main benefit of an unsecured loan is that you don’t need to put down any collateral. You may also be able to access funds easier, and and there is more flexibility in how you can use loan proceeds.

Key factors for choosing a loan type

Choosing the best loan type will depend on factors like your credit profile, what you need the loan for, and how much you need to borrow. For example, if you have a limited credit history and are looking for ways to boost your credit score, a secured credit card may be the best option. Or, if you want a loan for several home improvement projects and you have a high credit score, an unsecured personal loan may offer you more flexibility.

Whatever type of loan you choose, be sure to figure out how you plan on paying back the loan. You want to budget for a monthly payment that you can realistically afford. Shop around multiple lenders to find the best interest rate and terms based on your financial profile.

FAQ

Is it better to get a secured or unsecured loan?

Both types of loans offer a variety of benefits. If your credit score is on the lower end, you may want to consider a secured personal loan to improve your chances of approval. Unsecured loans are best for those who have good credit history and don’t need to borrow large amounts of money.

Does an unsecured loan hurt your credit?

An unsecured loan can temporarily affect your credit score when a lender conducts a hard credit check after you submit an application. Lenders also report your payment activity to the credit bureaus, so even one late payment can negatively affect your score.

Which type of loan has a lower interest rate?

In general, secured loans tend to have lower interest rates.

What happens if I default on a secured loan?

If you default on a secured loan, your lender has the right to seize your property.

Final thoughts

Taking out a secured or unsecured personal loan can help you get closer to your financial goals if you have a solid repayment plan. Someone with a lower credit score or who wants to borrow a large sum of money may be better off with a secured loan. Those with high credit scores or don’t have large funding needs can consider a secured loan.

No matter which kind of loan you choose, getting prequalified is a great way to see what you may qualify for. Rocket Loans^SM offers a simple online application process and even offers same day funding.