Secured Vs. Unsecured Loans: What You Need to Know Before You Borrow

If you need to borrow money, you’ll likely encounter two different types of personal loans: secured and unsecured. Choosing the option that is right for you will depend on several factors, such as your income, assets, credit score, purpose for the loan, and the amount of money you need to borrow.

Secured Loans

To qualify for a secured loan, you’ll need a source of collateral. This may be a home, an automobile, or a significant asset the bank would be able to seize should you default on the loan.


  • Higher Loan Amounts: a secured loan often enables a borrower to access a higher amount of money than an unsecured loan.
  • Lower Interest Rates: because of the collateral requirement, banks are often able to offer lower interest rates on secured loans.


  • Asset Limitations: since your asset is being used as collateral in acquiring the loan, you may have limited flexibility when it comes to selling that asset.
  • Risk of Losing Asset: should you default on your loan, you risk losing the asset you offered up as collateral to acquire the secured loan.

Unsecured Loans

Unsecured loans often have more lenient qualification requirements compared to secured loans. They are based on a borrower’s income, employment history, and creditworthiness, rather than collateral.


  • Flexible Use: unsecured loans may be used for whatever purpose the borrower desires without the restrictions that may come with a secured loan.
  • No Collateral: if you don’t have any significant assets or are unwilling to use an asset as collateral, an unsecured loan may be your best option.
  • Easier to Qualify: unsecured loans are generally easier to qualify for particularly if the borrower has good credit.


  • Higher interest rates: because unsecured loans carry more risk for the lender, they typically come with higher interest rates than secured loans.
  • Lower loan amounts: without collateral, lenders may be less likely to offer you a higher loan amount.
  • Not for major expenses: with higher interest rates and lower loan amounts, unsecured loans may not be the best option for home renovations or major purchases like automobiles.

Choosing Between Secured and Unsecured Loans

If you’re unsure of which loan option is right for you, consult with your lender. They may have a variety of solutions to fit your borrowing needs.

Before you apply for a loan:

  • Know your credit status: by checking your credit report and score, you can discuss your financial situation with a lender before submitting a credit application. Too many credit inquiries can ultimately hurt your credit score.
  • Look for the best rates: many banks provide rates on their websites, or you can call or stop into a branch.

Staying informed about the loan options that are available to you will ultimately help you make the best financial decision for your personal situation.