Secured Loan vs. Unsecured Loan: What’s the Difference?

When you find yourself in need of financial products, you may be surprised by the wide variety of loan types and regulatory standards. Namely, there are unsecured and secured loans. Today, we will take a look at each type of loan to show you the differences, how they compare, and which type is the best for your needs.

What Is an Unsecured Loan?

Unsecured loans are often referred to as personal loans. Typically, these are loans that require more on a credit score than on attached collateral. However, there are some unsecured loan types that focus on employment status over credit. Let’s take a look at some of the most common unsecured loan options.

Common Unsecured Loans

Three common unsecured loans are payday loans, peer-to-peer loans, and signature loans. Typically, these loans require the user to show proof of employment, a high credit score, and a general reliability for repayment. However, payday loans are a bit of a standout option in the unsecured loan world.

Payday loans focus much more on the applicant’s employment and payday schedule than their credit, which is why they are so popular among those with no credit or bad credit. That said, the lender you apply with will still run a soft credit check on you to get your credit score and some other basic information.

Unsecured Loan Pros:

  • No need for collateral
  • Faster approvals and release of funds
  • Options that are good for lower credit scores
  • Easy to apply online or in-person

Unsecured Loan Cons:

  • Typically have higher APRs
  • Lower loan amounts available
  • Some loan types require very high credit
  • Strict regulations can reduce repayment options

What Is a Secured Loan?

Secured loans are a more traditional form of lending. These often come from banks, government lending agencies, and institutions that allow collateral loans (like pawn shops). These loans can accept moderately lower credit scores, but any negative marks toward repayment history can be a deal breaker, or require mountains of paperwork meant to “explain” why there are issues on the credit report. Here are some of the most common secured loan types.

Common Secured Loans

Mortgage loans, pawn shop loans, and car title loans are some of the most well-known secured loans. These loans have one thing in common: they require collateral. Mortgage loans come with a lien on the home, car title loans come with a lien on the car, and pawn shop loans come with a lien on whatever items you provided to secure the loan.

Essentially, you either repay the loan or these items become forfeit to the lender. They will sell the item and if it doesn’t sell for as much as you owe on the loan, you will typically receive a bill for the remaining amount.

Secured Loan Pros:

  • Loans can have lower APRs and longer repayment terms
  • Many loan options to help those with varying levels of income and credit
  • Larger loan amounts available

Secured Loan Cons:

  • Must have a valuable piece of collateral to secure loan
  • Most applications will need to be done in person
  • May require a cosigner to secure

Secured and Unsecured Loans: Similarities and Differences

Though every type of loan is completely different, there are some similarities among them as well. Understanding how each type of loan differs and relates can ultimately help you to decide which type of loan is best for you. Let’s take a quick look at the main similarities and differences between secured and unsecured loans.


  • Both loan types are available for those with mid-tier to good credit
  • Both loan types have options that are helpful for emergency financial assistance
  • Failure to pay either loan can result in negative credit marks and a possible loss of income or property


  • Secured loans require collateral before funds can be released
  • Unsecured loans have higher interest rates in exchange for lower approval requirements
  • Secured loans are often larger loans (mortgage, car title, etc.)
  • Unsecured loans are the best option for emergency situations where an applicant needs money quickly

Which Type of Loan Is Best for You?

Determining which loan is best for you comes down to a few things: your credit score, how much you need, and how much you can afford to pay back. If you are looking for a large loan that you want to pay out over a large period of time, you will likely have more luck with a secured loan. These are especially good for buying a home, a car, or another large piece of property.

If you are in a situation where you need a smaller amount, but need it fast, unsecured loans are a good option. Payday loans in particular are helpful for those with bad credit who are in need of emergency funds to cover things like medical bills, home repairs, etc. If you are facing a monetary crisis, you may find an unsecured loan to be the answer to your problems.

The post Secured Loan vs. Unsecured Loan: What’s the Difference? appeared first on Home Business Magazine.

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