Most personal loans are unsecured, meaning you borrow on the strength of your credit and income alone. Some lenders also offer secured personal loans, backed by something you own. The difference affects how easy it is to qualify, what you pay and what you stand to lose.
Key takeaways
- Unsecured loans need no collateral but usually cost more.
- Secured loans can be easier to get and cheaper, but you can lose the asset.
- Never pledge something you depend on unless the payment is comfortable.
How unsecured personal loans work
The lender reviews your credit history, income and existing debts, then decides whether to approve you and at what rate. No asset is pledged. If you stop paying, the lender cannot simply take your property, but the account can go to collections, your credit will suffer and the lender may take legal action.
Because the lender carries more risk, unsecured loans tend to cost more, and approval is harder if your credit history is short or damaged.
How secured personal loans work
A secured loan is backed by collateral. Common examples are a savings account, a certificate of deposit or a vehicle. The collateral lowers the lender’s risk, so it can help you qualify, borrow more or receive a lower rate.
The risk shifts to you. If you default, the lender can claim the collateral. With savings-secured loans, part of your savings may be frozen until the loan is repaid.
Side-by-side comparison
| Unsecured | Secured | |
|---|---|---|
| Collateral | None | Savings, CD, vehicle or other asset |
| Approval | Based on credit and income | Easier with collateral |
| Typical cost | Higher | Often lower |
| Risk if you default | Credit damage, collections | Loss of the collateral, plus credit damage |
| Best for | Good credit, no asset to pledge | Building credit, or cutting the rate |
Which one fits
- Choose unsecured if you qualify at a reasonable rate and prefer not to put an asset at risk.
- Consider secured if unsecured offers are expensive, you are rebuilding credit, or you have savings you do not need to touch during the loan.
- Avoid pledging something you depend on, such as the car you need to get to work, unless the payment is comfortably affordable.
Tip: Compare the APR, the fees and the term on every offer, and read exactly what happens to the collateral if you miss a payment.
Where to find each type
Unsecured personal loans are offered by banks, credit unions and online lenders. Secured personal loans are more common at banks and credit unions, especially loans backed by a savings account or certificate of deposit held at the same institution. Some online lenders accept a vehicle as collateral.
Credit unions often have more flexible rules for members, so they are worth checking if your credit is still being built.
How to compare offers step by step
- Prequalify for unsecured loans first to see what rate you can get without collateral.
- Ask your bank or credit union for a secured quote on the same amount and term.
- Compare the APR, fees and monthly payment side by side.
- Read what happens to the collateral if you miss one payment, and after how long it can be taken.
- Decide whether the saving is worth the risk to the asset.
Mistakes to avoid
Pledging an asset you rely on daily is the biggest risk, because losing it can make it harder to earn the money to repay other debts. Another mistake is taking a secured loan against savings you might need in an emergency, since that money may be frozen until the loan is repaid. Finally, avoid high-cost short-term products marketed as easy approval. A standard secured loan from a bank or credit union is usually far cheaper.
Common questions
Is a car title loan the same as a secured personal loan?
No. Title loans are usually short-term, very expensive and put your car at quick risk of repossession. A secured personal loan from a bank or credit union is a different product.
Can a secured loan help build credit?
Yes, if the lender reports to the credit bureaus and you pay on time. Ask before applying.
Can I switch from a secured to an unsecured loan later?
Not directly, but once your credit improves you may be able to refinance into an unsecured loan and release the collateral.
Do secured loans have lower approval standards?
Collateral reduces the lender’s risk, so approval can be easier, but lenders still check your income and ability to repay.
Combining several balances into one? Start with debt consolidation. For a single big purchase, compare a personal loan with a credit card.