Most personal loans are unsecured, but some lenders offer secured versions
A secured personal loan requires you to pledge an asset — usually a car, savings account, or home equity — as collateral. If you stop paying, the lender can seize that asset to recover what you owe. An unsecured personal loan has no collateral attached. The lender's only recourse if you default is to sue you, report the debt to credit bureaus, or send it to a collection agency.
Most personal loans offered by banks, credit unions, and online lenders are unsecured. Secured personal loans exist but are less common in the personal lending market — you are more likely to encounter them as home equity loans or car title loans, which are secured by specific assets.
The difference matters because it affects the interest rate you pay, the amount you can borrow, and what happens if you cannot repay.
Key Takeaways
- Unsecured personal loans do not require collateral, but typically carry higher interest rates because the lender bears more risk.
- Secured personal loans require you to pledge an asset as collateral, which usually results in a lower interest rate.
- If you default on a secured loan, the lender can seize the collateral; with an unsecured loan, they must pursue legal collection.
- Your credit score, income, and debt-to-income ratio matter for both types, but a secured loan may be easier to obtain with poor credit if you have valuable collateral.
How unsecured personal loans work
With an unsecured personal loan, the lender approves you based on your credit score, income, employment history, and existing debt. They are betting that your financial track record shows you will repay. If you have a good credit score (typically 670 or higher), you will see lower interest rates. If your score is lower, the rate climbs because the lender sees you as a higher risk.
The lender has no claim to your possessions. If you miss payments, they report it to credit bureaus, which damages your credit score. They may also sue you in court to obtain a judgment, which can lead to wage garnishment or a bank levy — but only after going through the legal system. This process takes time and costs the lender money, which is why unsecured rates are generally higher than secured rates.
Unsecured personal loans typically range from $1,000 to $50,000, though some lenders go higher. The amount depends on your income and creditworthiness, not on the value of an asset you own.
How secured personal loans work
With a secured personal loan, you pledge an asset upfront. Common collateral includes a savings account (the simplest form), a vehicle, or home equity. The lender places a lien on the asset, meaning they have a legal claim to it if you default.
Because the lender has collateral to recover their money, they typically offer lower interest rates than unsecured loans. You may also borrow larger amounts, since the lender's risk is reduced. If you have poor credit but own a car or have savings, a secured loan may be your only option or your cheapest option.
The trade-off is clear: if you stop paying, the lender can repossess your car, freeze your savings account, or foreclose on your home equity without going to court first. The process is faster and cheaper for them than pursuing an unsecured debt through the legal system.
Interest rates: why secured loans cost less
Unsecured personal loans typically carry interest rates between 6% and 36%, depending on your credit score and the lender. Secured personal loans often range from 5% to 20%, though the exact rate depends on the collateral type and its value.
The difference exists because a secured lender has a safety net. If you default, they recover their money by selling the collateral. An unsecured lender has no such may provide and must absorb the loss if you never pay. To offset that risk, they charge higher rates to borrowers across the board.
Your credit score still matters for a secured loan — a lender will not lend against a car worth $10,000 if your credit history suggests you will default. But a secured loan can sometimes lower your rate by 2 to 5 percentage points compared to an unsecured loan to the same borrower.
Collateral options for secured personal loans
A savings account is the simplest collateral. You deposit money into an account the lender controls, and they lend you money against it. You pay interest on the loan while your savings earn interest (usually minimal). When you repay the loan, you regain access to your savings. This type is sometimes called a passbook loan or savings-secured loan.
A vehicle can serve as collateral through a car title loan. You keep driving the car while the lender holds the title. If you default, they repossess it. Car title loans often carry very high interest rates (25% to 300% or more) and short repayment terms, making them risky despite being secured.
Home equity is collateral for a home equity loan or home equity line of credit (HELOC). These are secured personal loans in the sense that your home backs the debt, but they are typically larger and have longer terms than traditional personal loans. If you default, the lender can foreclose.
When to choose secured versus unsecured
Choose an unsecured personal loan if you have decent credit (670 or above), want to avoid risking an asset, and can accept a higher interest rate. Unsecured loans are faster to process and simpler — no appraisal of collateral, no lien paperwork.
Choose a secured personal loan if your credit score is low but you have collateral you can pledge, if you want a lower interest rate and can afford the monthly payment, or if you need to borrow a large amount. Be certain you can repay before pledging an asset, because the consequences of default are when ready and concrete.
If you are considering a car title loan or payday loan (which is often secured by a post-dated check), pause and explore unsecured options first. These products carry extremely high rates and short terms that make them difficult to repay.
How collateral affects your borrowing power
With an unsecured loan, the amount you can borrow depends almost entirely on your income and existing debt. A lender will typically cap your loan at a percentage of your annual income — often 10% to 50%, depending on the lender and your credit profile.
With a secured loan, the collateral value sets a ceiling. You cannot borrow more than the collateral is worth (and usually less, to give the lender a safety margin). A $5,000 savings account lets you borrow up to roughly $5,000. A car worth $15,000 might support a $10,000 to $12,000 loan.
This means a secured loan can help you borrow more if you have valuable collateral but limited income. It can also help you borrow at all if your credit is poor, because the lender's risk is backed by an asset rather than your promise alone.
Frequently Asked Questions
Can I get an unsecured personal loan with bad credit?
Yes, but the interest rate will be high — often 25% to 36% or more. Some online lenders specialize in bad-credit loans. A secured loan may offer a lower rate if you have collateral, but compare the total cost of both options before deciding.
What happens if I cannot repay a secured personal loan?
The lender can seize the collateral without a court order. If it is a savings account, they freeze it. If it is a car, they repossess it. If it is home equity, they can foreclose. You also face credit damage and may be sued for any shortfall between what the collateral sells for and what you owe.
Is a secured loan safer for the borrower or the lender?
It is safer for the lender. The borrower takes on more risk because they stand to lose an asset. The lender's risk is reduced because they have collateral to recover. This is why secured loans have lower interest rates — the lender is compensating themselves less for risk.
Can I use my home as collateral for a personal loan?
Yes, through a home equity loan or HELOC. These are secured by your home and typically offer lower rates than unsecured personal loans. However, if you default, the lender can foreclose, meaning you could lose your home. Use this option only if you are confident you can repay.
Do I need collateral to get a personal loan?
No. Most personal loans are unsecured and require no collateral. You will need a decent credit score and proof of income, but not an asset to pledge. If your credit is poor, you may find unsecured loans harder to obtain, which is when a secured option becomes relevant.