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Financial Literacy

What is the Difference Between Secured and Unsecured Loans?

The difference between secured and unsecured loans is that secured personal loans are backed by something of value, like your home or your car. Unsecured loans are not backed by collateral and are usually issued based on criteria such as your credit score and income.

For example, a home equity line of credit (or HELOC), is usually secured (or backed) by your physical home, thus making the HELOC a secured loan.

Unsecured personal loans, like a Best Egg personal loan, do not require collateral. Factors like your income, credit history, and other information on your credit report can help companies figure out if a loan is right for you. If you’re strapped for time and considering whether to apply for a secured vs unsecured loans, keep in mind that unsecured loans could be a faster option if you need money quickly.

What is a Secured Personal Loan?

A secured personal loan is a loan that is backed by collateral. Valuable items typically used as collateral for secured personal loans can range from vehicles to homes.
If a secured personal loan is, in fact, the route a borrower wants to take, it’s vital that they fully understand how important repayment on the loan is, and what may happen to their collateral if their loan payments aren’t being made. In some cases, if the borrower defaults on the loan, the lender can take certain actions to mitigate their losses. Some lenders may even collect and sell the collateral.

Types of Secured Loans:

There are several different types of secured personal loans available to consumers. Whether you want to purchase a home, a vehicle or apply for a credit card, there may be secured loan options available to you.

  • Mortgage Loans: A loan that is used to finance a home purchase. The collateral = the house itself.
  • Vehicle Loans: Secured loans that use the vehicle as collateral. For example, the lender pays the dealership the full amount, and the borrower pays the lender in monthly installments.
  • Secured Credit Cards: Credit cards that are secured by an up-front cash deposit. These are ideal for those looking to establish credit or rebuild their credit.  The lender can apply the cash deposit towards the monthly bill if the card user does not pay it on time.
  • Title Loans: Short-term loans that offer quick monetary solutions to those who are willing to place their paid-off vehicle up as collateral. Although title loans don’t require credit checks, they do typically have high-interest rates and require borrowers to prove they have a steady income to repay the loan.

What Is an Unsecured Personal Loan?

An unsecured personal loan is typically based on your ability to repay, your creditworthiness, and information provided on your application. Unsecured personal loans are not backed by collateral. Even though unsecured personal loans can be obtained without collateral, borrowers who default on their loan could still face consequences of not paying their debt. Borrowers risk hurting their credit score and their chances of obtaining another unsecured loan.

There are numerous types of unsecured personal loans available for those who qualify.

  • Credit Cards: The most widely-held form of unsecured personal loans are credit cards. Each time you swipe your card, you’re essentially “borrowing” funds when and where you need them, up to your credit limit.
    re typically based on creditworthiness, income and are subject to verification. Personal loans are a great option for quick funds with no collateral.

You may use an unsecured loan, like a Best Egg personal loan, for a variety of purposes. From consolidating credit card debt to paying for a wedding, the possibilities are endless:

Are you ready to check your rate without any impact on your credit score? Apply Now

This article is for educational purposes only and is not intended to provide financial, tax or legal advice. You should consult a professional for specific advice. Best Egg is not responsible for the information contained in third-party sites cited or hyperlinked in this article. Best Egg is not responsible for, and does not provide or endorse third party products, services or other third-party content.

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