Secured and unsecured personal loans: What's the difference?

If you've financed anything before, you already have experience with secured and unsecured loans — even if you didn't know it.

Mortgages, home equity lines of credit and auto loans are all examples of secured loans, or loans that are attached to an asset or piece of collateral (which, in the cases of these examples, are the items you purchased with the loan).

Examples of unsecured loans, or loans that don't have an asset attached to them, are credit cards, student loans and most personal loans.

Either type of loan is generally available from a bank or other financial institution, such as a credit union or private lending company. As you're deciding on the loan you need and where to apply for it, consider terms, fees, interest rates and other conditions so you can compare and find the option right for you.

An attached asset is just one difference between secured and unsecured loans. Speed of funding, interest rates, and loan terms and limits also vary depending on the type of loan and the lender.

Understanding these differences and how each type of loan works can help you make a responsible financial decision.

Unsecured personal loan

A common type of an unsecured loan is a personal loan. You may qualify for one without having to provide your bank or financial institution with some sort of collateral.

You can increase your chances of qualifying by having good or better credit and a favorable debt-to-income ratio. Remember, different lenders can have different qualifications, and each application process likely includes a credit inquiry^{See note1} that may affect your credit score.

Credit behaviors that affect your score include:

• Paying your bills on time
• How much available credit you're using
• The length of your credit history
• The mix of different types of credit you're using
• How often you apply for new lines of credit

Minimum requirements related to these factors are generally higher and less negotiable for an unsecured personal loan because the risk of the loan falls on the lender if you default. If you're not able to pay it back, they lose money and your credit score will probably take a hit.

To learn more about credit scores, check out our article devoted to helping you get and keep good credit.

Secured personal loan

A secured personal loan might be a better option if you don't meet the minimum qualifications for your lender's unsecured personal loan.

Secured personal loans are a type of collateralized loan — a loan that's backed by an asset the borrower provides to the lender. The lender will assess the same factors (credit and debt-to-income ratio) along with the asset that's offered.

Some examples of collateral assets are:

• Savings accounts
• Certificates of deposit
• Stocks
• Real estate like land and homes
• Property such as vehicles, jewelry and collectibles

This asset helps give the lender security because if you're not able to pay back the loan, the bank can take the asset from you, sell it, and apply the proceeds to help cover the outstanding unpaid balance of the loan. Even though you're providing an asset as collateral, your credit score can still be negatively affected if you default on the unsecured loan.

Comparing secured and unsecured loans

Now that you know how each type works, here are more differences between secured and unsecured loans.

Speed of funding.

Many banks and financial institutions allow you to apply online for a personal loan. Once approved, you're usually given your interest rate right away and the funds could be in your account as soon as 24 hours after closing. This process may differ depending on whether you're applying for a secured or unsecured loan. Come prepared with the information you need for the application to help move things along. This could include tax returns, checking and savings accounts, and deeds or titles of collateral assets.

Interest rates.

Unsecured loans typically have higher interest rates because they're a bigger risk to the lender. This means a higher monthly payment amount with the same amount, length and terms. Secured loans tend to have lower interest rates because the borrower's collateral means the lender is taking less of a risk. No matter which type of personal loan, the length of the loan and the amount borrowed can also affect the interest rate.

Terms and limits.

Again, these factors are based on who's taking the greater risk in the loan transaction. Unsecured loans that are riskier for the lender can have more stringent terms and conditions. The borrowing limit may be lower, and the amount of time to pay back the loan may be shorter. Secured loans are typically more flexible, with higher borrowing limits and longer repayment schedules.

Whichever type of loan you choose, think about how to include this new monthly expense in your budget. If your goal is to keep your total monthly expenses close to what it was before the loan, find other areas where you can spend less or even eliminate another debt altogether.

Paying back a loan is an act of financial discipline. But at the end of the term, your rewards will be twofold: enjoying the thing you needed the loan for in the first place, and establishing a pattern of disciplined payments that you can apply towards a new savings goal.

The USAA Advice Center provides general advice, tools and resources to guide your journey. Content may mention products, features or services that USAA Federal Savings Bank does not offer. The information contained is provided for informational purposes only and is not intended to represent any endorsement, expressed or implied, by USAA or any affiliates. All information provided is subject to change without notice.