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- Unsecured personal loans and credit cards don't require any collateral.
- Secured loans, like a mortgage or auto loan, require you to pledge an asset as collateral.
- Before you borrow money, take time to explore both secured and unsecured options.
Consumers who need to borrow money have a wide range of loan options to consider. However, all loans, lines of credit, and other financing methods fall into one of two categories — unsecured or secured debts.
While both secured and unsecured loans and lines of credit could help you reach your goals, there is one main factor that sets them apart. Where secured loans require collateral, unsecured financing methods don't require any collateral at all.
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What is an unsecured loan?
Unsecured loans and financial products can come in many different forms, but the underlying premise and agreement is the same. Consumers are not required to put down any of their assets to obtain an unsecured loan, but they do have to agree to repay the monies they borrow — plus interest, of course.
Without any collateral requirement at the beginning of the loan, it shouldn't surprise you that unsecured debts have more stringent requirements to qualify. The best personal loan rates you may have access to depends on your credit score. You typically need good or excellent credit to qualify for unsecured loans with the best interest rates and loan terms. You also need to be able to illustrate your ability to repay and be able to prove you have a reasonable amount of liabilities compared to your income.
Unsecured debts can come in many forms, the most common being:
- Unsecured credit cards (the vast majority of credit cards)
- Most personal loans
- Student loans
Other debts that are considered unsecured include telephone and electric bills (and other utilities), court judgments, gym memberships, and even medical bills. Unsecured debts are any type of debt that is not secured by an asset.
Advantages of unsecured loans and lines of credit:
- When you apply for an unsecured loan or credit card, you won't have to put down a cash deposit as collateral.
- If you default on an unsecured debt, the bank won't be able to seize your assets.
- The application process is usually quick and painless. You can apply for unsecured personal loans and credit cards online and from the comfort of your home.
Disadvantages of unsecured loans and lines of credit:
- While the bank cannot seize your assets if you default on an unsecured debt, they can try to obtain a judgment against you. Defaulting on your loan will also result in severe damage to your credit score that may be difficult to overcome.
- Requirements for approval are tighter. You need good or excellent credit (usually a FICO score of 740+) and a solid work history to qualify for unsecured loans and credit cards with the best interest rates, terms, and perks. You may be able to qualify for some unsecured loans with fair credit, but you'll typically pay a higher interest rate and more fees.
- Interest rates tend to be higher on unsecured debts when compared to some types of secured debts.
What is a secured loan?
Secured debts are any type of debt that is held with an underlying form of collateral. This could be a cash deposit you put down, an automobile, your home, stock you own, or any other asset that has significant value.
Secured debts are typically considered lower-risk for the lender since they do have an asset to seize in the event the borrower stops making payments. For that reason, secured debts often have lower interest rates than unsecured alternatives.
Secured loans and lines of credit can work very differently depending on the type of secured debt you're dealing with. The most common types include:
- Secured credit cards
- Secured personal loans
- Home equity loans
- Home Equity Lines of Credit (HELOCs)
- Auto loans
- Mortgages
Unsecured loans vs. secured loans
| Unsecured loans | Secured loans | |
| Collateral required? | No | Yes |
| Credit check? | Yes | Yes, but may be able to get one with worse credit history |
| Approval requirements? | Tighter | Looser |
| Speed of application process? | Fast | Sometimes slow |
| Failure to repay? | Lender can't seize your assets | Lender may be able to seize your assets |
Before you borrow money, take out a line of credit, or apply for a credit card, make sure you know the difference between secured and unsecured debts. While either can help you reach your goals, the presence or absence of collateral is an important consideration that should be decided ahead of time.
Whatever you do, take the time to compare loan options and read the fine print before you sign on the dotted line for any type of loan. If there are any unsavory terms and conditions to be found, they will be tucked away in the fine print.
Frequently asked questions
An example of an unsecured loan is a personal loan. Personal loans almost never require collateral, and approval decisions are instead based on your credit history and other aspects of your financial situation.
An unsecured loan is a loan that doesn't require collateral to get. This is different from a secured loan, like a mortgage or a car, where the lender can repossess the asset if you fail to repay the loan.
An unsecured loan can be harder to qualify for than a secured loan because lending decisions are primarily based on your credit history. If your credit score isn't in the best shape, you may not be eligible or will face higher interest rates.
Loan eligibility requirements vary based on the lender, but generally, the higher your credit score, the more likely you are to qualify for an unsecured loan. If you don't have the best credit score, some lenders will still give you a loan.
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