Secured vs Unsecured Loans

Loans generally fall into two categories: secured and unsecured. The difference affects interest rates, approval requirements, and the risk you take as a borrower. Understanding how secured and unsecured loans work can help you choose the right option for your situation.

What Is a Secured Loan?

A secured loan is backed by collateral — an asset the lender can seize if you fail to repay the loan. Common types of collateral include vehicles, savings accounts, or property.

Because the lender takes on less risk, secured loans often come with lower interest rates and higher borrowing limits.

What Is an Unsecured Loan?

An unsecured loan does not require collateral. Approval is based on factors such as your credit score, income, and overall financial health.

Personal loans and credit cards are common examples of unsecured loans. Since the lender assumes more risk, interest rates are typically higher than secured loans.

Key Differences Between Secured and Unsecured Loans

• Secured loans require collateral; unsecured loans do not
• Secured loans often have lower interest rates
• Unsecured loans rely more heavily on creditworthiness
• Defaulting on a secured loan can result in asset loss

Which Type of Loan Is Right for You?

The right choice depends on your financial situation, credit profile, and risk tolerance. Secured loans may be better for large expenses or lower rates, while unsecured loans offer flexibility without risking personal assets.