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Secured and Unsecured Personal Loans Explained


Secured and Unsecured Personal Loans Explained

A personal loan comes in two “flavors.” It can either be a secured loan or an unsecured loan. When it comes to checking out your option for personal loans, it is important to make sure you know how they work.

Knowing how these types of personal loans work allows you to decide which type of personal loan is the best for you.

You can secure a personal loan for almost any purpose such as renovating your home, going on a dream vacation, paying for a wedding, or paying off your credit card debt.

The difference between secured loans and unsecured loans can affect how likely your loan gets approved and the interest rate.

What are Secured Personal Loans? 

Secured loans are personal loans backed by collateral. Should you default on your loan, the collateral will be seized by the lender. A repossession of collateral can stay on your credit report for up to seven years.

A secured personal loan is typically used for debt consolidation and various other purposes such as to pay medical bills or any other purpose.

The collateral for a secured personal loan could be any kind of financial asset you own including:

  • Bank accounts (savings accounts, checking accounts, money market accounts, or Certificates of Deposits)
  • Real estate
  • Vehicles

In a secured personal loan, the lender puts a lien on your collateral. Once you have paid off your loan, the lender takes out the lien.

If you use money from your savings account Certificate of Deposit as collateral, you typically will not have access to it until you have fully repaid your loan.

If you use your vehicle as collateral, you get to keep it throughout the repayment term as long as you make on-time payments.

The advantages of secured personal loans include:

  • Easier to qualify
  • Higher borrowing limits
  • Lower interest rates
  • Longer Repayment terms

The lender also considers your credit score, income and debts, and credit history, however, collateral lowers the risk of the lender giving it more confidence to lend to you.

If you do not repay your secured personal loan, your credit score will suffer and the lender can seize your collateral. Your credit score can drop by as many as 100 points and your collateral can be seized after only a few missed payments.

The process of seizing collateral due to nonpayment depends on your state laws and type of collateral. When the lenders can seize your collateral it should be outlined on your loan contract.

A lender usually sells seized properties and the proceeds are used to pay off your debt and other costs associated with recovering its losses.

You can get some money out of the sale of your collateral after the lender has been fully paid. However, if the sale of your collateral is not enough to repay your loan, some lenders will try to collect from you the difference.

Secured personal loans are available in banks and credit unions.

What are Unsecured Personal Loans? 

An unsecured personal loan does not require you to put up collateral for your loan. You do not risk losing an asset in case you default on your loan. Thus, if you cannot pay, the lender cannot claim compensation.

Lenders give out unsecured loans because they believe you have the financial resources to repay your loan. In an unsecured loan, you will be assessed based on the Five C’s of Credit:

  • Credit score – 690 or higher FICO (used by lenders to assess your creditworthiness), employment history, and references.
  • Capacity to pay. Debt-to-income ratio.
  • Conditions. Repayment terms of the loan

Unsecured loans come with fixed rates typically between 6% and 36%. Qualified borrowers get the lowest Annual Percentage Rates (APRs) while those with fair or bad credit scores (689 or lower FICO) get higher rates.

Repayment terms for unsecured loans are often two to seven years with fixed interest rates and are paid in monthly installments.

Some borrowers prefer unsecured loans because they feel it is a safer choice. A default can only result in the lowering of your credit score.

Missed repayments can also mean sending your account to a collection agency which can take you to court.

Many banks and credit unions offer unsecured loans. A fast cash loan (usually available online) or short-term loan with an easy and quick application process is a common type of unsecured loan.

REVIEW: Secured vs Unsecured Personal Loans

It is easier to get approved for a secured personal loan than an unsecured personal loan.

You need collateral for secured loans while you do not for unsecured loans. The lender can seize your collateral in the event of a default. In an unsecured loan, your assets are not at risk.

Interest rates are lower when a personal loan is backed by collateral. Interest rates are higher when a personal loan is backed only by your creditworthiness.

A secured loan has a higher borrowing limit and longer repayment terms than an unsecured personal loan.

Unsecured loans are available in many banks, credit unions, and online lenders. Secured loans are not as widely available.

Availing of an unsecured loan is a simpler process than applying for a secured loan. This is because there are other lenders, such as online lenders, that offer unsecured personal loans.

You can consider getting a secure personal loan if you…

  • Have an asset to give as a collateral
  • Want to avail of the lowest interest rate possible
  • Have a fair or bad credit score
  • Want to get a larger loan amount and longer repayment term

You can consider getting an unsecured personal loan if you….

  • Do not have an asset to give as collateral
  • Have a good or excellent credit score
  • Do not need a larger loan amount

Final Thoughts

Personal loans that are right for you largely depend on your credit score, what you can provide lenders, and the loan amount you need.

Study closely the difference between secured loans and unsecured loans before deciding on what type of personal loan to apply for.


Deciding between a secure or unsecure  personal loan can affect your finances for years to come. It’s a big decision that comes with a big responsibility. When evaluating a personal loans remember  that the right choice depends heavily on how it will work with your financial situation. Choose a lender who understands your financial goals and offers a loan type that helps you achieve those goals.

Whether you are looking for a secure or unsecured Personal Loan we can help. At Greater Alliance Credit Union, we offer both these options. To learn more about our loan features and rates, call us today 201-599-5500 or visit one of our branches to see which option works best for you. Or if you’re ready to begin the application process, visit our application page to get started