You might consider a secured personal loan if you want to borrow a large sum (e.g., more than $50,000), have less-than-perfect credit, or pay a lower APR.
Not only is it often easier to qualify for a secured personal loan versus an unsecured personal loan, but you’ll usually pay a lower rate, and loan amounts tend to be higher. Secured loans aren’t as risky to lenders, so they can offer more favorable terms.
You can get secured personal loans from most banks and credit unions, as well as certain online lenders.
In this guide:
- Secured vs. unsecured personal loans
- Pros and cons of secured personal loans
- Pros and cons of unsecured personal loans
- Is an unsecured loan or a secured loan best for you?
- How to apply for a personal loan
Secured vs. unsecured personal loans
The two main types of personal loans you can consider are secured and unsecured. When you get a secured personal loan, you sign a security agreement to give your lender rights to collateral (e.g., cash or a car) it can use to repay the loan if you don’t pay as agreed.
An unsecured personal loan differs from a secured one because it isn’t backed by collateral. So, if you don’t pay as agreed, the lender doesn’t have collateral it can use to recoup the money it loaned you. This makes unsecured loans riskier to the lender and, thus, more challenging and expensive to get.
The lender is taking more risk when it makes an unsecured loan, so you’ll often see higher interest rates for these loans. Lenders usually require borrowers to meet stricter qualifications for unsecured loans too. You can expect to pay lower rates for secured personal loans, which are also easier to get.
Standard terms and features of secured versus unsecured personal loans are:
|Secured personal loan||Unsecured personal loan|
|Loan amounts||$1,000 – $100,000||$1,000 – $50,000|
|Collateral||Certificates of deposit (CDs), share certificates, savings accounts, investment accounts, vehicles||None|
|Repayment terms||12 – 84 months||12 – 84 months|
|APR range||3% – 30%||7% – 30%|
|Credit score requirements||Poor credit score may be OK||Fair credit score often required|
|Income requirements||Sufficient to repay the loan (e.g., 43% – 50% max debt-to-income ratio [DTI]), but sometimes none||Sufficient to repay the loan (e.g., 43% – 50% max DTI)|
|Use of funds||Almost any purpose||Almost any purpose|
|Funding speed||1 – 7 business days||1 – 3 business days|
|Where to get a loan||Banks, credit unions, online lenders||Banks, credit unions, online lenders|
Loan amounts and collateral
You may get a higher loan amount with a secured loan versus an unsecured loan. It’s common for lenders to offer up to $100,000 or more for a secured loan, but standard loan amounts for unsecured personal loans max out at $50,000.
The difference between these loan amounts relates to the collateral. Lenders are willing to lend more with secured loans because they’re more confident they can recoup some of the money they loaned by liquidating your collateral and applying the funds to your loan.
The amount you can borrow with an unsecured loan is limited by your credit score (better credit scores can get higher amounts) and your income (you need to be able to repay the funds you borrowed). The value of the collateral also limits secured loan amounts.
Many lenders allow you to borrow 90% to 100% of your pledged cash collateral (e.g., funds in a CD or share certificate account). The same is often true for vehicles or investments, but it might be lower depending on the asset (e.g., you can borrow less with old cars or some investment types).
Many secured and unsecured personal loans offer repayment terms ranging from 12 to 84 months, but qualifying for a longer repayment term with a secured loan may be more manageable. The repayment term is often tied to how long the collateral will last or the length of the collateral pledged.
With a CD or share certificate-secured loan, the repayment term often matches the length of the deposit account term. So if you pledge a 12-month CD as collateral, the term of your loan will be 12 months. If you pledge a newer car, you might get a term of up to 84 months.
The terms of unsecured loans, on the other hand, often depend on your credit score. The lender takes more risk with longer repayment terms, so you may only be able to get a longer repayment term if you meet specific credit criteria (e.g., a good credit score).
Also, with secured and unsecured loans, you’ll only be able to get a repayment term resulting in a payment you can afford. You may have to get a longer-term if you can’t afford the payment with a shorter term (e.g., it causes your debt-to-income ratio to exceed the lender’s limit).
With most personal loans, your annual percentage rate (APR) ties to your creditworthiness, with the best rates reserved for the most qualified borrowers (e.g., those with the highest credit scores and lowest debt-to-income ratios).
However, with secured loans, the rates are sometimes tied to the assets you pledge as collateral. For example, if you pledge a CD as collateral, the interest rate you pay on the loan might be tied to the interest rate you earn on the collateral account.
For example, let’s say you have a CD that earns an interest rate of 2%. In this case, the rate on your secured personal loan rate might be 1% more than the CD rate—3%. With this pricing, your credit score doesn’t matter except to the extent it helps you qualify for the loan.
Using a secured personal loan structured with this type of pricing, you can build your credit while paying a reasonable interest rate on the borrowed money.
No matter what type of personal loan you get, you must meet several creditworthiness qualifications for approval.
The goal with lenders’ qualifications is to identify two factors:
- Your willingness to repay the loan
- Your ability to repay
Lenders often evaluate your willingness to repay the loan by considering your credit score and history. A low credit score and poor credit history might indicate you’ll be unwilling to repay the loan based on how you’ve handled your credit.
If the problems with your credit were due to something you couldn’t control or you resolved, lenders may be willing to overlook them (e.g., past medical collections). They may also offer a secured loan so they can see how you perform and help you rebuild your credit.
An ongoing credit issue (e.g., an active bankruptcy) may affect your ability to repay, and you may not get approved. Lenders also measure the ability to repay via a DTI ratio (43% to 50% max is often required), but this sometimes isn’t needed with a cash-secured loan.
Use of funds
You can use most personal loans (secured and unsecured) for almost any purpose, but lenders might restrict certain uses. For example, you might be unable to use a personal loan to invest in stocks or pay for college. You also can’t use the proceeds for any illegal purpose.
Your lender will ask how you plan to use the funds when you apply for the loan. If its lending policies restrict your loan use, it won’t approve your loan. Most lenders will tell you about loan use restrictions upfront, so you should know before applying.
Once the lender approves your loan, you may be able to get funded in one to seven business days for a secured loan. Unsecured loans are often funded in one to three days—faster than secured loans—because there isn’t any collateral.
If your collateral is cash held in a deposit account with your lender, funding for a secured loan might take only one day. If a third party (e.g., another bank) holds the collateral or there’s a title (e.g., a vehicle), it might take a week or longer to get funded.
Where to get a personal loan
You can get unsecured and secured personal loans from most banks and credit unions, along with many online lenders.
Secured loans require more paperwork than unsecured loans because the lender must record its security interest in your collateral. If you offer cash or investment accounts as security for the loan, the paperwork is faster and easier if you hold the asset with your lender.
Most banks and credit unions offer secured loans because it’s straightforward to take a security interest in the collateral, such as a deposit account. These lenders often offer other types of secured loans (e.g., auto loans and mortgages), so they’re skilled at documenting these loans.
Some online lenders don’t have the staffing or expertise to manage collateral, so they only offer unsecured loans. If you’re interested in getting a secured loan from an online lender, check whether the lender offers it before applying.
Pros and cons of secured personal loans
As with any financial decision, we advise considering the advantages and disadvantages of secured personal loans. These include the following.
You might be able to get a lower rate.
Rates are often lower with a secured personal loan because lenders can use your collateral to repay some of your loan if you fail to do so. Since lenders are taking less risk, they may charge better rates.
You may qualify with low credit scores or income levels.
Secured loans are backed by collateral, so lenders have something besides creditworthiness to rely on for repayment. You may get approved even with poor credit or low income.
You may qualify with low credit scores or income levels.
You might be able to borrow more money. Maximum loan amounts are often higher with secured loans than with unsecured loans. Lenders can offer higher loan amounts because of the collateral, but the collateral value can limit how much you get.
You need collateral to get approved.
If you don’t have collateral to offer a lender, you won’t be able to get approved for a secured loan. The type of collateral you can offer depends on the lender, but common examples are cash, stock, or cars.
You may only be able to borrow a fraction of your collateral’s value…
Not only do you need collateral to get a secured loan, but the loan amount you can borrow is sometimes limited to a fraction of your collateral’s value (e.g., 90%).
You might get your funds more slowly.
The lender has to complete paperwork to take a security interest in the collateral, but the funding speed could be slower for a secured loan. Even still, secured personal loans can often get funded in a week or less.
Pros and cons of unsecured personal loans
The pros and cons of unsecured personal loans include the following.
Get approved without collateral.
This is a benefit since you’re not at risk of losing your collateral if you can’t repay the loan. Plus, even if you have no collateral to offer, you might be able to get this type of loan.
You can often get funded in one business day.
Since there’s no paperwork related to the assets pledged as collateral, funding is usually faster with an unsecured loan than a secured loan.
Get these from most banks, credit unions, and online lenders.
Most lenders offer unsecured loans. You can also get a secured loan at almost any bank or credit union, but certain online lenders only offer unsecured loans.
Loan amount might be smaller.
The lender takes on more risk with an unsecured loan, so the maximum amount you can borrow might be lower than with a secured loan.
You might pay a higher APR than with a secured loan.
Lenders charge higher rates on unsecured loans to compensate for the additional risk they take on these loans versus secured ones—i.e., no collateral in case you don’t pay as agreed.
You may need to meet stricter qualifications to get approved.
Unsecured loans are riskier than secured ones, so you often need better credit and more income to qualify.
Is an unsecured loan or a secured loan best for you?
The three main factors to consider when evaluating whether a secured or unsecured loan is best for you are:
- How much you want to borrow
- What type of collateral you can offer the lender
- The strength of your financial condition
If you want to borrow more than $50,000, many lenders will require some type of collateral (e.g., cash, investments) unless your financial condition is top-notch (e.g., high income, high net worth, and excellent credit).
If your financial condition is less than stellar, you may be able to borrow more than $50,000 by offering collateral to your lender (e.g., cash, investments). Plus, APRs are often lower, and it’s easier to qualify for secured loans. You may even be able to qualify with a poor credit score.
In general, you need at least fair-to-good credit to qualify for an unsecured loan, but you’ll often get the best rates with good to excellent credit. Certain lenders will qualify you for an unsecured loan with poor credit, but the APR may be high. Standard credit score ranges are:
|Credit score category||Credit score range|
|Excellent||800 – 850|
|Very good||740 – 799|
|Good||670 – 739|
|Fair||580 – 669|
|Poor||300 – 579|
If you don’t know your credit score, many banks and credit unions offer free access to your credit report if you have a bank account with them. You can also check your score via several free and fee-based options.
Get a free copy of your credit report from each credit reporting agency by visiting AnnualCreditReport.com. This free credit report doesn’t include your credit score, but you can see what’s reported. You can also purchase a report with your score from credit reporting agencies.
Many lenders will allow you to apply for a personal loan without affecting your credit score; they use a “soft credit pull” to preapprove borrowers. You can see whether you’re likely to qualify with no impact on your credit. It can be a favorable option if you don’t know your score or just want to shop around for the best rate.
How to apply for a personal loan
Once you identify a lender, the next step is to apply online. The application process is often the same for both types of loans, except you’ll need to provide details about the collateral for a secured loan and the standard information about yourself and your income.
Many lenders will use a soft credit check to see whether you’re preapproved and let you know the rates and terms you might get. Plus, if you don’t qualify for an unsecured loan, the lender might offer a secured one instead.
You can use the preapproval to compare offers between lenders and choose the one that’s right for you. You should choose a lender with a solid reputation and a loan with the best possible rates and terms.