Secured vs. Unsecured Loan: What Are the Differences?

Secured vs. Unsecured Loan: What Are the Differences?

By Lizzy Martini

If you’re considering taking out a loan, you might be trying to choose between a secured vs. unsecured loan. What is the difference between secured and unsecured loans, and which type is a better fit for your financial goals?

 

Here’s what you need to know about secured vs. unsecured loans—broken down in to three easy categories.

 

1. Collateral
The most fundamental difference between secured vs. unsecured loans is collateral—in other words, whether an asset backs the loan.

 

A secured loan is backed by an asset. If you stop making payments on the loan, the lender can seize the asset—known as repossession or foreclosure—and try to sell it to recoup their money. Mortgages, auto loans and pawn loans are common examples of secured loans.

 

An unsecured loan is not backed by an asset, which means there is no collateral—like a house or car—for the lender to seize if the borrower stops making payments. Most credit cards and personal installment loans are unsecured loans.

 

2. Interest Rates
Interest rates for secured loans tend to be lower than for unsecured loans because secured loans are generally less risky for the lender.

 

If you stop making payments on a secured loan, the lender can try to sell the collateral to recover their money. If you stop making payments on an unsecured loan, the lender can still try to recoup their money—but it won’t be as simple as seizing and selling the collateral. To compensate for the additional risk, lenders generally require higher interest rates on unsecured loans.

 

Collateral, however, is not the only thing that influences your interest rate. Lenders also assess your credit profile—regardless of whether the loan is secured or unsecured. As part of this process, lenders may consider your credit report, credit score, income and/or employment status.

 

3. Loan Amount
For a secured loan, the value of your collateral plays a primary role in determining the size of the loan. Typically, lenders allow you to borrow less than 100% of the assessed value of the asset. For example, if you’re buying a car worth $10,000, the dealer might be willing to lend you $8,000 to buy the car. In this scenario, the “loan to value ratio” (LTV) is 80%.

 

For an unsecured loan, the loan amount is largely determined by your credit profile. The lender assesses how much debt they think you can responsibly manage and pay back on time. For certain types of unsecured loans, the amount can also be subject to state laws. In California, for example, the maximum amount you can get from a payday lender is $300.

 

Secured vs. unsecured loan: Key differences

 

Secured Loan

Unsecured Loan

Collateral Required

Yes

No

Interest Rates

Can be lower than for unsecured loans

Can be higher than for secured loans

Loan Amount

Primarily determined by the value of collateral

Largely based on credit profile

 

Secured vs. unsecured loan: Which is right for you?
Like all financial decisions, this one is personal—it really depends on your unique financial situation and goals. For example, some borrowers aren’t comfortable pledging their home or car as collateral for a loan, so they opt for an unsecured loan. Other borrowers, however, might have damaged credit profiles and find the terms on a secured loan to be more attractive.

 

Wondering if an unsecured personal loan could be right for you? At RISE, we offer a simple online application, cash in your account as soon as tomorrow, and interest rates that go down over time. 

 

We’re helping hard-working people like you take control of your finances and make lasting improvements to your financial future. Apply for a RISE unsecured personal loan today.

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