Most personal loans are unsecured, but some lenders offer secured versions

A personal loan is either secured or unsecured depending on whether you pledge an asset as collateral. Most personal loans you'll encounter are unsecured — the lender gives you money based on your credit score and income, not on anything you own. If you stop paying, the lender can't seize your car or house; they can only sue you or send the debt to collections. A secured personal loan works differently: you put up collateral (usually a savings account, car, or other asset), and if you default, the lender can take it.

The choice between the two affects your interest rate, how much you can borrow, and what happens if you can't repay. Unsecured loans carry higher rates because the lender has more risk. Secured loans cost less but put your assets at real risk if you miss payments.

Key Takeaways

  • Unsecured personal loans require no collateral and are approved based on credit score and income, but carry higher interest rates.
  • Secured personal loans let you pledge an asset like a savings account or vehicle, which lowers your rate but means the lender can seize that asset if you default.
  • Unsecured loans are more common and faster to close because there's no asset to appraise or lien to file.
  • Secured loans may be your only option if your credit is poor or you need to borrow a large amount.

How unsecured personal loans work

With an unsecured loan, the lender approves you based on your credit history, income, and debt-to-income ratio. They run a hard credit inquiry, verify your employment, and check your bank statements — but they don't ask you to pledge anything. If you default, they have no legal claim to your possessions; they can only pursue collection actions or sue you in court.

Because the lender bears all the risk, unsecured personal loans typically carry interest rates between 6% and 36%, depending on your credit score and the lender. Someone with excellent credit might get 6% to 10%; someone with fair or poor credit might pay 25% to 36%. The loan closes quickly — often within a few business days — because there's no asset to appraise or lien to file.

Unsecured loans work well if you have decent credit, need money for a specific purpose (debt consolidation, home repairs, medical bills), and want to avoid risking your assets. Most personal loans offered by banks, credit unions, and online lenders are unsecured.

How secured personal loans work

A secured personal loan requires you to pledge an asset as collateral. Common collateral includes a savings account, certificate of deposit (CD), car, or home equity. The lender places a lien on the asset or freezes the funds, meaning you can't access or sell it while the loan is active. If you stop making payments, the lender can seize and sell the collateral to recover their money.

Because the lender has collateral to fall back on, secured loans carry lower interest rates — often 3% to 15%, depending on the asset and your credit. The tradeoff is clear: you pay less, but you risk losing something you own. Closing takes longer because the lender must appraise the asset, file paperwork, and set up the lien.

Secured loans are most useful if your credit is poor or damaged, you need to borrow a large amount, or you want a significantly lower rate. Some credit unions and online lenders offer them, though they're less common than unsecured options. If you use a savings account as collateral, you're essentially borrowing against your own money at a lower rate than you'd pay unsecured — which can make sense if you're building credit or need a lower payment.

Interest rates: the main difference between secured and unsecured

The interest rate is where the secured-versus-unsecured choice hits your wallet hardest. An unsecured loan to someone with a 650 credit score might cost 28% annual percentage rate (APR). The same person, using a savings account as collateral, might get 8% to 12% APR on a secured loan. Over a five-year loan, that difference adds up to thousands of dollars in interest.

The rate difference exists because the lender's risk is different. With an unsecured loan, if you default, the lender has to pursue you through the courts and hope to collect. With a secured loan, they simply take the collateral. That certainty lets them offer much lower rates.

Your credit score still matters for secured loans — a lender won't give you a great rate just because you have collateral — but it matters less. A secured loan can be a way to borrow at a reasonable rate even if your credit isn't strong.

What happens if you can't repay

Default on an unsecured personal loan, and the lender will contact you about missed payments, report the delinquency to the credit bureaus, and eventually send the debt to a collection agency or sue you. They can garnish your wages or place a lien on your home in some states, but they can't directly seize your car or bank account. The damage is to your credit score and your ability to borrow in the future.

Default on a secured loan, and the lender will seize the collateral. If you pledged a savings account, they'll freeze and take the funds. If you pledged a car, they'll repossess it. If you pledged home equity, they may foreclose. You lose the asset immediately, and the lender sells it to cover what you owe. You may still owe the difference if the sale price is less than the loan balance — called a deficiency — though some states limit this.

This is why secured loans carry real consequences. You're not just risking your credit; you're risking something tangible you own.

Which type should you choose

Start with unsecured if your credit is decent (670 or higher) and you can afford the higher rate. You avoid risking your assets, the process is faster, and most lenders offer unsecured options. The higher interest is the cost of that safety.

Consider secured if your credit is poor, you need to borrow a large amount, or the rate difference is worth the risk to you. If you have a savings account you're not using and can afford to have it frozen for the loan term, a secured loan can cut your rate dramatically. Just be honest with yourself: can you make the payments? If not, don't pledge collateral you can't afford to lose.

Talk to multiple lenders — banks, credit unions, and online lenders all offer personal loans — and compare both unsecured and secured options. Some lenders will quote you for both, so you can see the rate difference and decide whether the savings are worth the risk.

Frequently Asked Questions

Can I get an unsecured personal loan with bad credit?

Yes, but the interest rate will be high — typically 30% to 36% APR. Some online lenders specialize in bad-credit loans. A secured loan might be a better option because the rate will be lower, though you'll risk your collateral.

What if I use my car as collateral and can't pay back the loan?

The lender will repossess the car and sell it to cover the loan balance. If the sale price is less than what you owe, you may be responsible for the difference. You'll lose transportation and damage your credit.

Is a secured loan a good way to build credit?

Yes, if you can afford the payments. Making on-time payments on a secured loan shows lenders you're reliable, and your credit score will improve over time. Just make sure the collateral is something you can afford to lose if life gets difficult.

Do I have to use a savings account as collateral, or can I use something else?

It depends on the lender. Some accept only savings accounts or CDs. Others accept vehicles, home equity, or other assets. Ask the lender what collateral they accept before you apply.

Can I pay off a secured personal loan early?

Usually yes, but check the loan agreement for prepayment penalties. Some lenders charge a fee if you pay off early; others don't. If there's no penalty, paying early saves you interest and frees up your collateral sooner.