Secured Loan vs. Unsecured Loan: Which Should You Take?

A secured loan is backed by collateral, such as your home or vehicle, while an unsecured loan does not require any pledged assets. Each type of loan comes with its own set of trade-offs. However, the most appropriate option typically depends on your credit and financial goals, as well as the amount you want to borrow.

Consider speaking with a financial advisor who can help you understand how picking a loan fits into your financial plan.

What Is a Secured Loan?

A secured loan is a type of debt that requires the borrower to provide collateral. This is as an asset the lender can seize if the borrower defaults. Common examples of secured loans include mortgages, auto loans and home equity loans.

Because the lender takes on less risk, secured loans typically come with lower interest rates and higher borrowing limits. If you are considering a large loan and have valuable assets, a secured loan might offer better terms than an unsecured one. However, keep in mind that your property is at risk if you are unable to make your payments.

What Is an Unsecured Loan?

An unsecured loan does not require any collateral. Approval is based primarily on your credit score, income and repayment history. Personal loans, credit cards and student loans are all examples of unsecured loans.

Because lenders assume more risk with unsecured loans, they often charge higher interest rates. Borrowers with good to excellent credit are typically offered the most favorable terms.

If you default on your loan, the lender cannot take specific assets, but it can pursue collection efforts, report the default to credit bureaus or initiate a lawsuit.

Key Differences Between Secured and Unsecured Loans

Secured loans may be ideal for borrowers who need a large amount of money and have an asset to back it. Unsecured loans may appeal more to those with strong credit who prefer not to tie their assets to a loan.

These are some key differences to consider when deciding between a secured loan vs. unsecured loan.

Feature	Secured Loan	Unsecured Loan
Requires Collateral	Yes	No
Risk to Borrower	Assets subject to seizure	Legal action or credit damage
Interest Rates	Typically lower	Typically higher
Approval Criteria	Easier with poor credit	Ideal for good to excellent credit
Loan Amounts	Often higher	Often lower

Pros and Cons of Secured Loans

When considering a secured loan, it is helpful to weigh both the advantages and trade-offs.

Pros

Lower interest rates. Because they are backed by collateral, lenders typically offer more favorable interest rates compared to unsecured loans. This can result in significant savings over the life of the loan, especially for larger amounts.
Higher loan amounts. You may qualify for a higher loan amount when you offer an asset as collateral, such as a house or a vehicle. Lenders feel more comfortable lending larger sums when they have something to recoup in case of default.
More flexible credit requirements. Secured loans often have more lenient credit score requirements compared to unsecured loans because the collateral reduces the lender’s risk. This can be especially helpful for borrowers with fair or limited credit histories who need access to financing.

Cons

Risk of asset loss. If you default on the loan, the lender can seize the asset used as collateral, whether it is your home, vehicle or investment account. This can lead to long-term financial and personal consequences.
Longer processing time. Because secured loans typically involve appraisals, documentation and verification of ownership, the approval process may take longer. This can delay access to funds compared to the quicker turnaround of many unsecured loans.

These loans can provide borrowers with access to larger amounts of capital and lower rates, but they come with additional risks if repayment becomes difficult.

Pros and Cons of Unsecured Loans

These are the pros and cons to consider for unsecured loans.

Pros

No collateral required. You do not have to risk personal property, such as your home or car, to borrow money. This makes unsecured loans attractive for borrowers who lack significant assets or prefer not to tie them to a loan.
Faster access to funds. Many unsecured loans feature streamlined application processes and may offer same-day or next-day approval. This can be especially useful for emergencies or time-sensitive expenses.
Wider range of uses. Unsecured personal loans can often be used for a broader array of purposes, such as consolidating credit card debt, covering medical expenses or funding a vacation. Some secured loans are more limited in use, especially those tied to specific asset types.

Cons

Higher interest rates. Because lenders assume more risk without collateral, unsecured loans typically carry higher interest rates. This can make them more expensive, especially for borrowers with average or poor credit.
Lower borrowing limits. Without collateral to reduce risk, lenders are often less willing to approve large loan amounts. If you need substantial funding, an unsecured loan may fall short of your requirements.
Stricter approval requirements. Lenders typically require strong credit scores, steady income and low debt-to-income ratios to approve unsecured loans. If you do not meet those standards, your application may be denied or carry less favorable terms.

Unsecured loans offer convenience and speed, but they come with higher borrowing costs and stricter requirements. These loans work well for borrowers with good credit who require moderate amounts of funding and prefer not to risk personal assets.

When a Secured Loan Might Make Sense

Say you want to renovate your home and need $50,000. There are a few instances where a secured loan may make sense.

If you have home equity. If you have significant equity in your property, a home equity loan or home equity line of credit (HELOC) could provide the funding you need at a relatively low interest rate.
If you are using collateral. If your credit score is under 650, offering a paid-off vehicle as collateral may help you qualify for more favorable loan terms.
If you are consolidating high-interest debt. A secured loan may also make sense if you are consolidating high-interest debt and do not qualify for an affordable unsecured loan. Just make sure you do not overleverage your assets, especially if your income is uncertain.

Secured loans can also be a strategic choice for borrowers who require longer repayment periods or do not want to tap into retirement savings. Since the interest rates are often lower than credit cards or unsecured loans, they may result in lower monthly payments, making them easier to manage on a fixed income.

However, be sure to factor in potential fees, such as closing costs, appraisal costs and title charges, especially with home-secured options. Before proceeding, compare the total cost of borrowing, both interest and fees, across all your available loan types.

When an Unsecured Loan Might Be a Better Fit

There are some cases where an unsecured loan may work better.

Small loans. An unsecured personal loan may be the better choice if you have good credit and are borrowing a small amount, like $8,000 for a family emergency or medical expense. You will avoid the paperwork and will not have to risk collateral while still benefiting from access to quick funds.
Short-term loans. Unsecured loans can also work well for short-term financing needs where the risk of asset forfeiture would outweigh the benefits of slightly lower interest rates. These loans are often a good fit for credit-savvy borrowers who want to preserve their assets while maintaining financial flexibility. Many unsecured personal loans come with fixed interest rates and set repayment terms, which can help with budgeting.

However, it is still critical to shop around for the best rate. Be sure to watch out for additional costs, such as origination fees or prepayment penalties. If your credit score is borderline, even a slight increase, such as from paying down a credit card balance, can significantly improve your terms. Always read the fine print and confirm that the monthly payments fit comfortably within your budget.

How These Loans Affect Your Credit

Both secured and unsecured loans can impact your credit, positively or negatively. On-time payments help build your credit history, while missed payments can damage it. A default on a secured loan will likely result in asset repossession, in addition to credit damage. Defaulting on an unsecured loan typically results in debt collection, lawsuits or wage garnishment.

Before taking out a loan, take time to assess how it will affect your credit utilization, debt-to-income ratio and long-term financial stability to determine whether it fits your financial situation.

Consider Talking to a Financial Advisor Before You Borrow

Choosing between a secured loan vs. unsecured loan is not just about interest rates. It is about how the debt fits into your overall financial picture.

A financial advisor can help you evaluate how the loan affects your finances, including your retirement timeline, emergency fund, tax situation and risk exposure. They can also walk you through alternatives, such as refinancing, debt consolidation or budgeting strategies that can help you avoid taking on new debt.

Whether you are financing a major expense or simply trying to manage your cash flow, expert guidance can help you make confident and informed decisions.

Bottom Line

Secured loans offer lower rates but more risk, while unsecured loans cost more yet protect your assets.

A secured loan offers lower interest rates and higher borrowing limits but carries the risk of losing valuable assets if payments are missed. An unsecured loan may be easier and faster to obtain but usually comes with higher interest rates and stricter credit requirements. The best choice depends on your financial goals, credit history, and how much risk you’re comfortable taking.

Certified Financial Planner™ Tanza Loudenback explains, “Secured loans have a time and place, such as when you buy a home with a mortgage, but you shouldn’t rely on them for borrowing. They will generally introduce more risk to your financial situation than an unsecured loan if you wind up not being able to make repayments.”

Financial Planning Tips

Whether you’re saving to buy a home or working toward another goal, a financial advisor can help you create a clear savings plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you want to diversify your portfolio, here’s a roundup of 13 investments to consider.

Tanza Loudenback, a Certified Financial Planner™ (CFP®), provided the quotes used in this article. Please note that Tanza is not a participant in SmartAsset AMP, is not an employee of SmartAsset and has been compensated. The opinions voiced in the quote(s) are for general information only and are not intended to provide specific advice or recommendations.