Secured vs Unsecured Loans

Get personalized rates in 60 seconds for secured and unsecured loans with no impact to your credit score
Apply

The Difference Between Secured and Unsecured Loans

How It Works

Check Offers With No Impact To Your Credit Score

Get Financed Quickly

Easy Monthly Payments

How We're Different

Get Offers in Seconds

Get pre-qualified for multiple loan offers with an easy online form.

Won't Impact Your Credit

Receive pre-qualified offers with no impact to your credit scores.

Competitive Payment Options

Loans up to $100,000; Terms up to 12 years; APRs as low as 5.24%.

Receive Funds Quickly

In some cases, receive funds in as little as one business day.

Secured vs unsecured loan – what’s the primary difference? Collateral. Secured loans require collateral and unsecured loans do not require collateral. While there are other differences that we will explain later on, collateral is the main differentiating factor. So which is better to use? The answer usually depends on your personal finances and needs. In most cases, unsecured loans are easier and faster to secure making them a preferred option. We encourage individuals to get educated on secured loans and unsecured loans in order to decide which type of loan is best for their situation. Below, we will help you compare the differences, advantages, and other details of a secured vs unsecured loan.

What is the difference between a secured and an unsecured loan?

As we mentioned above, secured loans require collateral and unsecured loans do not require collateral. Acceptable forms of collateral typically include an asset such as real estate or automobile. If you are using a $60,000 secured loan, you most likely won’t be able to provide a $15,000 vehicle as collateral. Lenders typically require that the collateral provided is of equal or greater value than the loan. Since lenders have collateral in exchange for secured loans, they are less risky for the lender. However, there can be more risk for the borrower. If you default on a secured loan you may risk losing the collateral you provided and damaging your credit. Most lenders offer higher loan amounts, lower rates, and longer terms on secured loans.

An example of a secured loan is an auto loan. If you need money to purchase a vehicle, you can borrow it from a lender. However, in exchange for the money, the lender will be posted as a lienholder on the vehicle’s title. This means if you default on the loan, they can repossess the vehicle and sell it to recoup their money. Another scenario could be if the vehicle is totaled and insurance pays off the vehicle. If money is still owed on the vehicle, insurance will be notified that there is a lienholder. Another example of a secured loan is a home equity loan. In order to qualify for a home equity loan, you will need to have equity in your home. Homeowners can then borrow against the equity in their home and receive cash. In exchange for the cash, the lender uses your home as collateral.

Secured loans can have a longer application process than unsecured loans because they are more complex. If you need funds quickly you may want to use an unsecured loan. Some lenders can fund unsecured loans the same business day. In addition, online lenders can offer a completely online application and approval process. While unsecured loans may have slightly higher interest rates and shorter terms, they are less risky for the borrower. The reduced risk for the borrower can easily offset the higher cost. In addition, all credit types can qualify for unsecured loans.

An example of an unsecured loan is a personal loan. Personal loans can be used for just about anything from home improvements to emergency expenses. Let’s say you have an upcoming wedding that you are planning. You need money for the photographer, florist, limousine company, and other vendors. If you do not have the cash available you could take a personal loan for the amount of money you need. In most cases, you’ll receive the funds as a lump sum that can be repaid over a certain term with interest.

Secured and unsecured loans can be offered with fixed and variable interest rates. Fixed-rate loans are typically easier to manage since the interest rate and minimum monthly payment does not change. Variable-rate loans may be attractive initially but can be a headache to deal with. In addition, if interest rates spike in the market, your ultra-low variable rate loan can turn into a high rate loan costing you more money.

What are the main advantages of a secured vs unsecured loan?

Whether you use a secured loan or an unsecured loan you should receive a lump sum of cash that can be repaid over a certain term with interest. Borrowers can also use a secured line of credit. A secured line of credit is still secured by collateral but works differently than a secured term loan. Regardless of the type of secured loan you choose, they can all offer similar benefits. Let’s look at the advantages of a secured vs unsecured loan.

Advantages of a secured loan

Larger loan amounts
In most cases, lenders have more confidence that they will be repaid for the money they loan with a secured loan. Therefore, they are usually willing to approve higher loan amounts with secured loans. However, you’ll need to have collateral that matches or exceeds the amount of the loan. If you are using a home equity loan you may only be able to borrow 75% to 90% of your available equity. If you are using an auto loan, you may be able to borrow more than the vehicle’s value since there are additional fees such as tax and license.

Lower interest rates
In exchange for providing collateral and reducing the risk for the lender, lenders usually offer lower interest rates for secured loans. Secured loans are typically more ideal for lenders so they want to make offers attractive for borrowers. Borrowers take more risk and usually have to do more leg work to obtain a secured loan. 

Longer terms
The terms offered usually depend on the type of secured loan you use. If you use a home equity loan, you can find terms ranging between 5 to 30 years. While if you are using an auto loan you can find terms up to 7 or 8 years. Some types of secured loans may allow the borrower to postpone repayment for a certain amount of time. 

Possible tax deductions
Some types of secured loans such as mortgages and home equity loans may be tax-deductible. Typically the loan amount itself is not tax deductible but the interest you pay may be tax-deductible. When it’s time to file taxes you should consult a professional to see if you are eligible for any deductions.

Advantages of an unsecured loan

No collateral required
One of the biggest perks of an unsecured loan is that you do not have to provide collateral. If you default on an unsecured loan you may damage your credit but that’s about it. In addition, if you are struggling to repay an unsecured loan, lenders may be more willing to work with you. Lenders may extend terms to lower monthly payments or find another arrangement that makes repaying the loan easier for the borrower. Since they do not have any collateral, they should be motivated to help you repay the loan.

Easier application process
Most lenders have less complicated and faster application processes for unsecured loans. Individuals can apply for an unsecured loan with any bank, credit union, or online lender that offers them. Online lenders typically have very competitive rates and terms. In addition, it may be faster to secure an unsecured loan using an online lender. Acorn Finance has top-rated lending partners that offer unsecured personal loans. 

All credit types can qualify
The terms offered usually depend on the type of secured loan you use. If you use a home equity loan, you can find terms ranging between 5 to 30 years. While if you are using an auto loan you can find terms up to 7 or 8 years. Some types of secured loans may allow the borrower to postpone repayment for a certain amount of time. 

Is a secured loan a bad idea?

Secured loans may not be a bad idea. If you can qualify for a secured loan you should consider the option but it may not be your first choice. Just know that if you default on the loan you will most likely lose the collateral you provide. However, the risk may be justifiable with lower interest rates and longer terms.

What do I need for an unsecured loan?

If you are considering an unsecured loan you should have some kind of credit history and stable income at the minimum. While some lenders may not require any supporting documents, other lenders may request proof of income, identification, residency, or other documents. In most cases, you won’t need much to qualify for an unsecured loan.

What happens if I don’t pay an unsecured loan?

If you miss a payment or two you’ll most likely be charged a late fee. However, if you miss more than a few payments the loan will most likely go into collections and damage your credit report. If you are struggling to repay an unsecured loan we encourage you to contact the lender and communicate with them. The sooner you contact the lender, the better. Most lenders are willing to work with borrowers to help them repay the loan.

Is a secured loan a bad idea?

Secured loans may be a better option if you can provide and are comfortable providing collateral. If you have any kind of uncertainty about being able to afford the monthly payment, for any loan, it may be a bad idea. In addition, if you do not do enough due diligence before accepting a secured loan offer, you may enter a bad loan agreement. Always make sure you compare offers and verify the legitimacy of the lender.

What are the disadvantages of an unsecured loan?

While an unsecured loan is considered less risky regarding your assets, there are still some disadvantages to unsecured loans. The main one is that interest rates are typically much higher. This means your monthly payment will be higher and your total loan cost will likely be higher as well.

They may also be harder to obtain because the lender knows that their money is more at risk. If you have a low credit score, short credit history, or don’t have regular income; you might be offered only secured loans. A co-signer might also be needed which can be hard to find. The co-signer will also need to have very good credit and be able to sign all the paperwork with you.

What is an example of an unsecured loan?

Unsecured loans can come in many different forms. If a loan is not secured by collateral, it’s usually classified as an unsecured loan. The main forms people think of when it comes to unsecured loans are:

Credit cards
Student loans
Any personal loan that doesn’t require collateral

All of these loans give you access to money without asking you to provide an asset in case the money is not paid back. Remember that unsecured loans can still affect you if you default on payments though. They can cause your credit score to drop and will make future lenders not want to work with you.

Even though you may not lose an asset, you should still make all your payments on time to avoid making your credit score drop. Unsecured loans might also have higher interest rates that might make the payments larger and harder to make. Always keep this in mind when deciding which loan you want to take.

How much can I borrow unsecured?

This all depends on the lender and your credit score. Some lenders may offer much higher loans than others. Every lender has its own terms and conditions. They usually start around $1,000 and may go up to $100,000. Just because the loan company advertises a maximum amount does not mean you will get it though. They will still check you against all the requirements and make sure you meet the criteria for lending.

If you want to qualify for more money and want to ensure you get the most possible, follow these tips:

Wait until you have had the same job or stable income for a few months or years. Lenders want to see you have a stable income and can keep a job.
Pay off other debts. If you can, pay off the other debts you have so your debt-to-income ratio is lower. The fewer debts you have, the more willing lenders might be to give you money.
Make sure you are using less than 30% of your credit lines. This will help lenders to know you don’t have a spending problem or an issue paying off credit cards.
Make sure your credit score is good. If you have missed a few payments lately or recently had a drop in score for another reason, wait until it has bounced back a bit before applying.

Remember also that just because a loan company offers you a large sum of money, doesn’t mean you should take it. Try to only take the amount you need for your needs. This will make it easier to pay back and ensure you aren’t spending too much money that you really can’t afford.

Can you pay off a secured loan early?

You can pay loans early, but it may come with some drawbacks. If you want to pay off the secured loan early, make sure your lender doesn’t charge any fees. If they do, make sure they are reasonable and will still save you money. If they are equal to the interest or more, it might not be worth it to make an early payment.

Check the terms and agreements to make sure you know the full early payment fees. Settling the loan early though can give you peace of mind. It will also help to ensure you don’t miss any payments if you have forgotten in the past.

If you want to pay off your secure loan early, contact your lender. In some cases, there may be no penalty at all for paying a loan off early and it may save you a lot of money.

Do you get your money back from a secured loan?

If you take out a secured loan, you are responsible for making the payments and ensuring that all the money is paid back. If you miss payments and your asset is taken as collateral, you will not be able to get your asset back. The lender will sell it or get money from it to make sure they get all of their money back.

Why is the cost of a secured loan lower than an unsecured loan?

Secured loans may have lower interest rates and have a lower cost because the lender is assuming less risk. If you default on the loan, the lender can take possession of the collateral you provided. For example, if you have an auto loan and you stop making payments, the lender can repossess the vehicle. If you have a home equity loan and you stop making payments, the lender can repossess your home.

Unsecured debts have no backing, and the lender will probably want to charge you more for it because they are taking a larger risk. They also only use your credit score and financial information to determine if you qualify. They will base the terms on these conditions and it is often hard to negotiate with them.

How can I get out of a secured loan?

Getting out of a secured loan can be difficult. You might need to sell your asset or talk to the lender to see what your options are for getting out of the payment. If the sale of your asset is more than the loan amount you owe, you might be able to pay back the full loan and have some money left over.

How do borrowers qualify for an unsecured loan?

The first step toward getting an unsecured loan is to get prequalified. At Acorn Finance, you can get prequalified in seconds without impacting your credit score. It might be helpful to check your credit score before applying. Credit scores can go up and down quickly. If you think you have a higher score than you do, you may be set back when the offers you get have high interest rates.

Having a good to an excellent credit score will ensure that you qualify for better loan terms and will give you more options for moving forward.

Conclusion

In conclusion, secured loans and unsecured loans are both good options. Your personal finances and situation usually determine which type of loan is best for you. If you are considering a personal loan you should apply through Acorn Finance. Acorn Finance has lending partners that offer personal loans up to $100,000 with terms up to 12 years and rates starting at 3.99%. Within minutes, applicants can receive multiple personalized loan offers without affecting their credit score. Acorn Finance makes finding the best unsecured personal loan offer easy and convenient.

Get pre-qualified for an unsecured loan up to $100,000. . . apply online today!

#1. Complete and submit a short loan application online

#2. Receive multiple pre-qualified offers

#3. Get connected with lenders to obtain your pre-qualified loan


Are You A Contractor? Stop Thinking & Start Doing with Acorn Finance.

Offer customers the ability to finance their dreams with zero dealer fees.

“The process couldn’t have been any easier. I filled out a short form that took me less than 2 minutes and within seconds I got multiple offers from lenders.”

 

– Mike T. (TN)

“It was important to me that I could review my offers without any impact to my credit score, before deciding on the best loan option.”

 

– Carol R (FL)

“I like the easy online and 100% paperless experience of Acorn Finance. I received my money two days after completing my application.”

 

– Bob S (WI)