While some people swear by a cash-only lifestyle, the truth is most of us rely on credit to pay for life's big expenses over time. When you want to buy a big-ticket item like a house or a car, open or grow a business, renovate a kitchen or pay for college, you can apply for a loan at either your local back or online to help you cover the cost.
When considering your credit options, you might have to decide between a secured and unsecured loan. Secured loans require that you offer up something you own of value as collateral in case you can't pay back your loan, whereas unsecured loans allow you borrow the money outright (after the lender considers your financials).
There are pros and cons to both types loans, so before you decide anything it's best to understand the strings attached.
What is a secured loan?
A secured loan is a loan backed by collateral. The most common types of secured loans are mortgages and car loans, and in the case of these loans, the collateral is your home or car. But really, collateral can be any kind of financial asset you own. And if you don't pay back your loan, the bank can seize your collateral as payment. A repossession stays on your credit report for up to seven years.
When you take out a secured loan, the lender puts a lien on the asset you offer up as collateral. Once the loan is paid off, the lender removes the lien, and you own both assets free and clear.
Here are the kinds of assets you can use as collateral for a secured loan, according to Experian:
- Real estate
- Bank accounts (checking accounts, savings accounts, CDs and money market accounts)
- Vehicles (cars, trucks, SUVs, motorcycles, boats, etc.)
- Stocks, mutual funds or bond investments
- Insurance policies, including life insurance
- High-end collectibles and other valuables (precious metals, antiques, etc.)
Secured credit cards, such as the Capital One Platinum Secured Credit Card (see rates and fees) and the Platinum Secured Mastercard® from First Tech Federal Credit Union , are another example of a secured loan. The collateral, in this case, is the cash you put down (often a $200 refundable deposit) that acts as your initial credit limit. You get your deposit back when you close the account.
Because your assets can be seized if you don't pay off your secured loan, they are arguably riskier than unsecured loans. You're still paying interest on the loan based on your creditworthiness, and in some cases fees, when you take out a secured loan.
Don't miss: The best secured credit cards of October 2020
What is an unsecured loan?
An unsecured loan requires no collateral, though you are still charged interest and sometimes fees. Student loans, personal loans and credit cards are all example of unsecured loans.
Since there's no collateral, financial institutions give out unsecured loans based in large part on your credit score and history of repaying past debts. For this reason, unsecured loans may have higher interest rates (but not always) than a secured loan.
Unsecuredpersonal loansaregrowing in popularity. There are roughly 20.2 million personal loan borrowers in the U.S. according to the online lending marketplaceLending Tree. You can take out a personal loan for nearly any purpose, whether that's to renovate your kitchen, pay for a wedding, go on a dream vacation or pay off credit card debt.
Most people get personal loans for debt consolidation, and since personal loans tend to have lower APR than credit cards, borrowers can often save money on interest.
What to know before you take out a loan
Before you take out a personal loan, whether it's secured or unsecured, make sure you have a clear payoff plan.
As a general rule, only borrow what you know you need and can afford to pay back. Make sure you are comfortable with the repayment timeframe. Just because you can get a loan doesn't mean you should, so take your time and do your research before you sign on the dotted line.
Learn more: 10 questions to ask before you take out a personal loan
Information about the Platinum Secured Mastercard® has been collected independently by Select and has not been reviewed or provided by the issuer prior to publication.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
FAQs
The Bottom Line
What is the difference between a secured and an unsecured loan? ›
The main difference between secured and unsecured loans is collateral: A secured loan requires collateral, while an unsecured loan does not. Unsecured loans are the more common of the two types of personal loans, but interest rates can be higher since they're backed only by your creditworthiness.
What is the difference between a secured loan and an unsecured loan quizlet? ›
What is the difference between a secured and unsecured loan? Secured loan uses collateral (i.e. car or house) where unsecured does not use collateral (loan made just on promise to pay it back). Secured loans are usually larger with lower interest rates. Unsecured are usually smaller with higher interest rates.
What is the difference between a secured and unsecured loan in the balance sheet? ›
A secured loan requires you to provide the lender with an asset that will be used as a collateral for the loan. Whereas and unsecured loan doesn't require you to provide an asset as collateral in order to attain a loan. Another key difference between a secured and unsecured loan is the rate of interest.
Are secured loans easier to get than unsecured? ›
Are secured loans easier to get? Generally speaking, yes. Because you're usually putting your home as a guarantee for payments, the lender will see you as less of a risk, and they'll rely less on your credit history and credit score to make the judgement.
What is the main difference between secured and unsecured? ›
Secured debt is backed by collateral, whereas unsecured debt doesn't require you to put any assets on the line to get approved. Because lenders take on more risk, unsecured debts tend to have higher interest rates and stricter eligibility requirements than secured debt.
What is the difference between a secured and unsecured note? ›
An unsecured note is not backed by any collateral and thus presents more risk to lenders. Due to the higher risk involved, these notes' interest rates are higher than with secured notes. In contrast, a secured note is a loan backed by the borrower's assets, such as a mortgage or auto loan.
What are the main advantages of a secured and unsecured loan secured? ›
Some advantages of secured loans include: You may be able to request larger amounts of money because of the reduced risk to the lender. Some lenders offer longer repayment terms and lower interest rates than those offered for unsecured loans. It may be easier to get a secured loan because of the collateral.
What is the difference between secured and unsecured loans Class 10? ›
With a secured loan, the personal property given as collateral to avail of the loan is at risk. If you fail to repay the loan, your property will be sold to recover the dues. And, in unsecured loans, typically the interest rates are much higher compared to secured loans. Secured or unsecured loans, which is high risk?
What is an example of secured debt? ›
There are two types of debt – secured and unsecured. If you have pledged property as collateral for a loan, the loan is called a secured debt. Examples of secured debt include homes loans and car loans.
Unsecured credit cards tend to come with better perks and rewards, lower fees and lower interest rates. Generally speaking, unsecured credit cards are a better deal for consumers.
What is the difference between secured loan and unsecured loan in Hindi? ›
सेक्योड और अनसेक्योर्ड लोन: क्या है फर्क
वहीं, अनसेक्योर्ड लोन के लिए कस्टमर को ज्यादा ब्याज चुकाना पड़ता है. सेक्योर्ड लोन (secured loan) मंजूर होने में ज्यादा समय लगता है क्योंकि बैंक गिरवी रखी जाने वाली एसेट की वैल्युएशन करते हैं. वहीं, अनसेक्योर्ड लोन बहुत जल्दी मंजूर हो जाता है.
What is an example of an unsecured loan? ›
Credit cards, student loans, and personal loans are examples of unsecured loans. If a borrower defaults on an unsecured loan, the lender may commission a collection agency to collect the debt or take the borrower to court.
What are the risks of a secured loan? ›
The term 'secured' refers to the fact a lender will need something as security in case you can't repay the loan. This will usually be your home, but it could also be your car, jewellery or other assets. Secured loans are less risky for lenders because they can take your asset if you can't make the repayments.
What are the main disadvantages of a secured loan? ›
The main disadvantages of secured loans include the potential to lose your collateral. Failure to pay back your loan could mean you lose your house, car or financial account — whatever you pledged as security on the loan.
Do banks prefer secured loans? ›
In general, secured loans are easier to qualify for since your collateral gives the lender additional peace of mind — if you fail to make payments, the lender can recover its money by seizing and selling your asset. For that reason, secured loans also tend to have lower interest rates than unsecured loans.
Is secured better than unsecured? ›
Key takeaways. Secured and unsecured credit cards have similarities, but they are different types of credit cards. Secured cards require a deposit, unlike unsecured cards. Compared to secured credit cards, unsecured credit cards may have lower interest rates and fees and higher credit limits.
What is secured loan and unsecured loan with examples? ›
Mortgages and auto loans are types of secured loans. Unsecured loans don't require collateral but may charge a higher interest rate and have tighter credit requirements because of the added risk to the lender. Many personal loans and most credit cards are unsecured.
What means unsecured loan? ›
Unsecured loans—sometimes referred to as signature loans or personal loans—are approved without the use of property or other assets as collateral. The terms of these loans, including approval and receipt, are most often contingent on a borrower's credit score.
