Secured Loans vs. Unsecured Loans – What’s the Difference?
4/17/2024
A college education. The perfect house. A shiny new motorcycle. That big vacation you’ve been thinking about for years. No matter what your dream is, a loan can put it into reach, and there’s probably a loan out there designed for your specific goals. You may see them categorized as “secured” or “unsecured’ – but what does that mean?
In short, a secured loan requires some sort of collateral, like your house or car, to guarantee the loan. If you fail to meet payments, your lender can seize your collateral. On the other hand, an unsecured loan is granted solely based on your credit and doesn’t require any collateral.
But both types of loans come with their own unique perks and nuances to consider before deciding which one is best for you.
Secured Loans
What is a secured loan?
A secured loan requires you to back it with some sort of collateral as part of the application process. Sometimes the collateral is the very thing you’re taking the loan out to pay for, like your house on a mortgage or your car on an auto loan. If you default on the loan, your lender can seize the collateral.
Because you’re offering up collateral, your lender is taking on less risk – which means you’ll typically enjoy lower interest rates and higher borrowing limits as a result. Secured loans are also easier to qualify for with a lower credit score.
You can apply for a secured loan at most credit unions and banks, and you’ll pay the loan back at a fixed monthly rate.
Pros of a Secured Loan
- Lower interest rates
- Higher borrowing limits
- Easier to qualify for than an unsecured loan
- Better option for lower credit scores
Cons of a Secured Loan
- Failure to meet payments can cost you your assets
- Defaulting on the loan can tank your credit score
- More restrictions on what they can be used for
Unsecured Loans
What is an unsecured loan?
Unsecured loans don’t require any form of collateral, but are instead granted solely based on your credit worthiness. For this reason, they tend to have tighter credit and income requirements than secured loans. You’ll also typically see higher interest rates and lower borrowing limits on these types of loans.
Unsecured loans usually come with fewer restrictions about what they can be used for. Like their secured counterparts, you can apply for an unsecured loan at most credit unions and banks, and make monthly payments at a fixed rate.
Pros of an Unsecured Loan
- No collateral
- More flexibility in what the loan can be used for
Cons of an Unsecured Loan
- Can be difficult to obtain without a good credit score
- Higher interest rates
- Lower borrowing limits
How do I choose which loan is right for me?
Depending on your financial situation, one type of loan might suit your goals better than the other. If you’re looking to up your credit score and feel confident you can make payments on time, a secured loan might be a good option for you. But if you’re unwilling to put your assets at risk, an unsecured loan is likely the better choice.
If you’re still unsure, don’t worry! Our friendly staff at Arkansas Federal Credit Union can help you make the best decision based on your needs and goals. Stop by your neighborhood branch or visit our loan page to get started today!
