Secured vs. Unsecured Personal Loans – What’s the Difference?


If you are considering applying for a personal loan, it’s important that you first understand the difference between unsecured and secured loans. The difference could impact how likely you’d be to get approved for a loan, the rate of interest you can get, and whether you’ll need to provide the lender some collateral against the loan. Here’s a look at how the types of loans compare.

What Is a Secured Personal Loan?

To get a secured personal loan, you’ve got to offer something called collateral to the lender. This acts as security if you default on your loan. In the case of a personal loan, the collateral could be a CD or the money in your savings account.

What Is an Unsecured Personal Loan?

An unsecured personal loan does not require you to offer up any collateral for the loan. But if you don’t repay it, your credit score will take a hit. And, lower credit scores will make it a lot harder for you to get approved for a loan or credit card in the future.

Interest Rates: Unsecured vs. Secured Personal Loans

Unsecured personal loans will usually have a higher rate of interest than secured personal loans unless you have an excellent credit score. That is because lenders view unsecured loans as riskier. Since you don’t put up any collateral, the lender really can’t tell whether you will repay the loan on time. And that higher risk translates into a higher interest rate for you.

A secured loan, however, has a lower rate because the lender can always seize your collateral if you fail to repay the loan.

Sources for Unsecured and Secured Personal Loans

Three types of financial institutions offer personal loans:

– Banks

– Online loan companies

– Credit unions

Of course, lenders will vary widely in terms of the interest rates they charge and their loan qualification requirements. But, banks tend to prefer lending to customers with high credit scores, while credit unions typically only offer loans to their members. Online lenders offer lower rates and have more convenient application processes set in place, but there’s no physical branch you can visit if you need any help.

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