Many personal loans are unsecured, but some lenders offer secured loans that are backed by collateral.
The main difference between secured and unsecured loans is collateral: A secured loan requires you to pledge something like a car or savings account, which the lender can take if you don’t pay them back. An unsecured loan does not require collateral.
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. With a secured loan, your collateral can take your application a step further to get you a lower rate or higher loan amount.
Here are key differences in how the loans work, which lenders offer them and how to qualify.
How do secured and unsecured loans work?
Qualifying: Secured personal loans can be easier to qualify for than unsecured loans. A lender considers your credit score, history, income and debts, but adding a savings account or vehicle to the application to secure the loan can give lenders more confidence to lend to you.
Rates: Secured loans typically have lower annual percentage rates than unsecured loans. Rates are decided using the same factors lenders review to qualify you, so the value of your collateral can affect your rate.
If you secure financing with a vehicle, for example, the value of the vehicle is a factor in deciding whether you qualify and what rate you’ll get.
Repayments: Secured personal loans are usually repaid in fixed, monthly installments over a few years. Some secured loans have variable rates, which means monthly payment amounts can also vary. TD Bank’s secured personal loan, for example, has a variable rate of 2% above the prime rate, which is the interest rate banks use to set rates on credit products.
Risk: The penalty for not repaying a secured loan is twofold: Your credit will suffer, and the lender can seize the collateral.
Even one missed payment can drop your credit score as many as 100 points — and the impact to your credit won’t be softened because it’s a secured loan.
Some states require lenders to give you time to resolve any missed or late payments before they take your collateral.
Where to get them: You can get a secured loan from a bank, credit union or online lender.
They’re more common from banks and credit unions, and they are typically secured with a savings or certificate of deposit account, which you usually can’t access until the loan is repaid in full.
Online lenders that offer secured loans tend to require a vehicle as collateral: Avant, Upgrade and OneMain all offer vehicle-secured loans. The lender may want the vehicle appraised before they lend to you.
Qualifying: Borrowers with good and excellent credit (690 or higher FICO) usually have the best chance of qualifying for an unsecured loan. Lenders review your credit score, history and debt-to-income ratio to decide whether you qualify. Some lenders review alternative data like your college education and where you live, too.
Rates: Unsecured loans have fixed rates that typically range from 6% to 36%. The lowest APRs usually go to the most qualified borrowers, while borrowers with fair or bad credit scores will get higher rates.
Repayments: Unsecured loans are repaid in fixed, monthly installments, and repayment terms are usually between two and seven years.
Risk: Unsecured loans may be a safer choice for some borrowers. If you fail to repay, only your credit will be affected. Some lenders allow you to go on a hardship plan if you can’t make your monthly payments. These plans can involve lowering or deferring your monthly payments.
If the loan is in default, which happens between 30 and 90 days after you miss a payment, it could be sent to collections and ultimately the collections agency can take you to court.
Where to get them: Online lenders can have low rates and features like fast funding and a fully online process.
Not all banks offer unsecured loans; Discover, PNC and Wells Fargo are among the national banks that do. These institutions may offer you a low rate if you’re already a customer.
Secured and unsecured loan uses
You can use funds from a secured personal loan for almost any purpose. You might secure the loan with a car you own, but you can use the funds for a home improvement project, for example.
In other cases, what you use the loan for can be your collateral. Banks offer RV loans, for example, that are secured by the camper or motorhome that you buy.
There are also few restrictions on how you use the funds from an unsecured personal loan. Common uses include debt or credit card consolidation and home improvement projects, but vacation, wedding and moving loans are all often unsecured.
Should you get a secured or unsecured personal loan?
If you have an excellent credit score and a debt-to-income ratio below 50%, consider pre-qualifying for an unsecured personal loan to see which rates a lender can offer you. Pre-qualifying doesn’t affect your credit, and it can give you an idea of how the monthly payments will fit into your budget.