Secured and Unsecured Personal Loans: What’s the Difference?

People look for personal loans for lots of reasons.

An accident can leave you with a big medical bill and car repairs, as well as lost income. You may need some seed capital to launch a home-based business.

As you start looking into your loan options, you’ll find two major types of loans: secured and unsecured loans. Both options can get you a lump sum of cash but come with different requirements.

Before you commit to either one, keep reading and learn how the loans differ from each other.

Secured Loans

When banks issue a secured loan, it means you provide them with some form of collateral. The collateral must typically match or exceed the value of the loan itself. This ensures that the bank can recoup the loan and any costs incurred by selling the collateral.

For example, you might put up your car as collateral to secure a loan for a few thousand dollars. As a general rule, you must own the property outright before you can use it for collateral.

Secured loans provide you a path to get credit when you might otherwise not get approved for a loan.

Unsecured Loans

Unsecured loans operate a little differently. Rather than requiring you to put up collateral, the bank or creditor makes a decision based on your creditworthiness. That means the bank or creditor will look at things like your credit score, employment status, and income.

If your credit report and score meet their basic requirements, they issue you a loan.

There is an exception to this basic process. Some creditors offer small installment loans that don’t require a credit check. You can see a good example of this over at Captain Cash installment loans.

These kinds of installment loans generally cap out between $500 and $1,000 dollars. The main requirement is that you have steady employment.

Secured Vs. Unsecured Loans

Both secured and unsecured loans come with, usually, a monthly payment plan. Your payments go toward the interest on the loan first before they begin paying down the principal.

In many cases, however, you can lock in a lower interest rate for secured loans than for unsecured loans. The main reason for this is that the bank knows it can recoup the loan by repossessing your car or selling off your vintage comic book collection.

With an unsecured loan, the bank issues the loan based largely on trust that you’ll repay the loan. That higher risk comes with a higher interest rate.

Parting Thoughts on Secured and Unsecured Loans

Secured and unsecured loans provide two different paths to the same end goal.

Secured loans work on the basis of collateral. You put up something of equal or greater value as a guarantee that the bank will get repaid.

Unsecured loans work on the basis of trust. Your creditworthiness acts as the promise of repayment, but typically with higher interest rates.