Most personal loans are unsecured, which means the lender has no claim to your property if you don't pay back
A personal loan is unsecured in most cases. That means you borrow money without putting up collateral — no house, car, savings account, or other asset that the lender can seize if you stop making payments. The lender's only recourse is to sue you, report the debt to credit bureaus, or send the account to a collection agency.
Some personal loans are secured, but this is less common. A secured personal loan requires you to pledge an asset — usually a savings account, certificate of deposit (CD), or sometimes a vehicle — as collateral. If you default, the lender can take that asset without going to court. Secured personal loans typically carry lower interest rates because the lender's risk is lower.
The difference matters because it affects what happens if you can't pay, how much interest you'll pay, and what the lender can do to recover the money.
Key Takeaways
- Unsecured personal loans don't require collateral, so the lender can only sue you or report the debt to credit agencies if you default.
- Secured personal loans require you to pledge an asset like a savings account or vehicle, and the lender can seize that asset if you don't pay.
- Unsecured loans carry higher interest rates because lenders take on more risk when there's no collateral to recover.
- Your credit score is the main factor lenders use to decide whether to offer you an unsecured loan and what rate to charge.
Why lenders care whether a loan is secured or unsecured
Lenders use collateral to reduce their risk. If you borrow $5,000 unsecured and disappear, the lender has spent time and money trying to collect through the court system, and may recover nothing. If you borrow $5,000 secured by a savings account, the lender can simply take the $5,000 from that account.
Because unsecured lending is riskier, lenders charge higher interest rates to unsecured borrowers. They also look more carefully at your credit history, income, and debt-to-income ratio. A lender offering an unsecured personal loan wants to know you have a track record of paying debts on time.
Secured personal loans are less common than they used to be. Most people who need a secured loan use a home equity line of credit (HELOC) or a home equity loan instead, because those rates are typically lower. Secured personal loans are most often offered by credit unions or smaller lenders.
How unsecured personal loans affect your credit and finances
When you take out an unsecured personal loan, the lender reports the account to the three major credit bureaus: Equifax, Experian, and TransUnion. Your payment history on that loan becomes part of your credit score. Making on-time payments helps your score; missed payments hurt it.
If you default on an unsecured personal loan, the lender can sue you in small claims court or civil court, depending on the amount. If the lender wins a judgment, they can garnish your wages, freeze your bank account, or place a lien on your property — depending on your state's laws. The debt can also be sold to a collection agency, which will report it to the credit bureaus and may contact you repeatedly to collect.
An unsecured loan does not put your existing assets at immediate risk the way a secured loan does. But a judgment or collection account can damage your credit for years and make it harder to borrow money, rent an apartment, or in some cases get a job.
How secured personal loans work differently
With a secured personal loan, you and the lender sign an agreement that names the collateral. The lender may place a hold on your savings account or require you to pledge a vehicle title. You still make monthly payments just as you would with an unsecured loan.
If you miss payments, the lender can seize the collateral without a court order. This process is called repossession (for vehicles) or account freeze (for savings). The lender sells the collateral and applies the proceeds to your debt. If the collateral doesn't cover the full amount owed, you may still be responsible for the difference, depending on your state's laws.
Secured personal loans are useful if you have poor credit or no credit history, because the collateral reduces the lender's risk enough that they'll lend to you at a lower rate than you'd get for an unsecured loan. However, you're putting an asset at risk, so you should only take this route if you're confident you can make the payments.
What determines whether you can get an unsecured personal loan
Lenders decide whether to offer you an unsecured loan based primarily on your credit score, income, and existing debt. Most lenders require a credit score of at least 600 to 650, though some will go lower. The higher your score, the lower your interest rate will be.
Lenders also calculate your debt-to-income ratio — the percentage of your monthly income that goes to debt payments. If you already owe a lot relative to your income, a lender may deny your application or offer you a smaller loan amount. You'll need to provide recent pay stubs, tax returns, or bank statements to prove your income.
If you have no credit history or very poor credit, you may not be able to get an unsecured personal loan from a traditional bank or credit union. In that case, you have three options: apply for a secured personal loan, look for a credit union that specializes in lending to people with poor credit, or consider a credit-builder loan (which is designed to help you build credit rather than to give you cash upfront).
Unsecured vs. secured personal loans: when to choose each
Choose an unsecured personal loan if you have decent credit (usually 650 or higher), a stable income, and want to avoid putting an asset at risk. You'll pay a higher interest rate, but you won't lose collateral if you default.
Choose a secured personal loan if your credit is poor, you're new to credit, or you want a lower interest rate and can afford to pledge collateral. Make sure you understand exactly what asset is at risk and what happens if you can't make a payment.
If you're considering a personal loan at all, compare offers from at least three lenders before you decide. Interest rates vary widely, and the difference between a 10% rate and a 20% rate can cost you thousands of dollars over the life of the loan.
Frequently Asked Questions
Can a personal loan become secured if I miss payments?
No. The terms of the loan are set when you sign the agreement. An unsecured loan stays unsecured, and a secured loan stays secured. However, if you default on an unsecured loan, the lender can sue you and obtain a judgment, which may allow them to place a lien on your property — but that's different from the loan itself becoming secured.
What's the difference between a personal loan and a credit card?
A personal loan gives you a lump sum upfront, which you repay in fixed monthly installments over a set period (usually 2 to 7 years). A credit card is a line of credit you can use repeatedly, with a variable interest rate and a minimum monthly payment. Personal loans are almost always unsecured; credit cards are always unsecured.
If I have a secured personal loan, can the lender take my collateral without warning?
Lenders must follow state law, which usually requires them to send you a notice of default and give you a chance to catch up on payments before seizing collateral. The exact timeline varies by state and by lender. Read your loan agreement carefully to understand the lender's rights and your rights.
Does paying off an unsecured personal loan help my credit score?
Yes. Paying off a loan on time shows lenders you can manage debt responsibly. Your credit score may dip slightly right after you pay off the loan because you have less active credit accounts, but it will recover and improve over time as the positive payment history remains on your report.