Secured vs. Unsecured Loans: The Difference Explained

When looking for loans, you will come across various types of loans designed to cater to varying needs and creditworthiness. There are mainly two types of loans: secured loans and unsecured loans.

Both of these loans are offered by banks, credit unions, and online lenders. However, the type of loan you opt for matters, which is why you should know the difference between them. 

In this secured vs. unsecured loans comparison guide, we will learn what secured and unsecured loans are and also discover the differences between them. So read on to make sure you choose the right loan for your needs.

Secured vs. Unsecured Loans: Everything You Need to Know

Before we explore the difference between secured and unsecured loans, let’s first learn what these loans actually are:

What Are Secured Loans?

As their name suggests, secured loans are “secured” for repayment by collateral, such as a car or a property. Failure to repay a secured loan can result in the confiscation of your collateral by the lender. 

Some secured loans also use money in your certificate of deposit (CD) or savings account as collateral. 

A few examples of secured loans include home loans, mortgages, auto loans, home equity loans, car title loans, secured lines of credit, home equity lines of credit (HELOCs), and savings-secured loans.

What Are Unsecured Loans?

Unsecured loans are not secured by any collateral. Their security is tied to your creditworthiness and other criteria. Therefore, unsecured loans are harder to acquire as compared to secure loans. They have strict requirements as they aren’t tied to any collateral.

However, since no collateral is involved, unsecured loans have a quick application and approval process. They’re also less risky as compared to secured loans.

Some examples of unsecured loans include credit cards, personal loans, student loans, term loans, revolving loans, and overdrafts.

What Is the Difference Between Secured and Unsecured Loans?

There are many differences between secured and unsecured loans:

1. Collateral Requirement

To acquire secured loans, you need to pledge an asset as collateral to the lender. This can include property, vehicles, or other valuable assets. 

On the other hand, unsecured loans don’t require collateral. They are approved based on your creditworthiness, income, and other key factors.

2. Application and Approval Process

The application and approval process for secured loans is more daunting as compared to unsecured loans. This is because it involves the evaluation of the collateral’s value.

Unsecured loans can be acquired daily quickly as they don’t have collateral. Their approval process depends on your financial profile, credit score, and debt-to-income ratio.

3. Risk

Secured loans are riskier for borrowers as they can result in the confiscation of collateral if they fail to repay the loan. 

However, since unsecured loans don’t have any collateral requirement, they are less risky for borrowers. But they come with strict loan terms and higher interest rates and APR.

4. Loan Amount and Loan Term 

With a secured loan, you can acquire a larger loan sum with long repayment terms as the lender has nothing to fear with the security of the collateral.

Unsecured loans, however, only offer a limited loan amount. They offer smaller sums and also have shorter repayment terms as they are more risky for the lender.

Which Loan Is Best for Me?

The type of loan you should get depends on your needs. If you are buying an asset like a car or property, or you are taking out a huge debt, secured loans are best for you.

But if you need to meet your smaller expenses such as a house repair, a student loan payment, or debt consolidation, you can opt for unsecured loans like personal loans. No matter the reason, make sure to consider these factors before taking out a loan.

If you are looking for the “best personal loans near me”, apply now for same-day approval.