When applying for an installment loan, lenders structure terms around risk. Deciding between a secured or unsecured personal loan hinges on whether you have collateral to pledge and the interest discount that collateral secures.
Core Distinctions at a Glance
| Characteristic | Unsecured Personal Loan | Secured Personal Loan |
|---|---|---|
| Collateral Required | None | Vehicle, CD, Savings, or Real Estate |
| Interest Rates | Higher (7% – 36% APR) | Lower (5% – 20% APR) |
| Approval Difficulty | Harder for subprime borrowers | Easier to qualify with fair/poor credit |
| Default Risk | Collections and credit score destruction | Direct forfeiture and seizure of pledged asset |
When to Choose an Unsecured Loan
An unsecured loan is preferable if you possess good-to-excellent credit (680+) and do not wish to put your car or savings account at risk. Check our rankings of the best debt consolidation personal loans for zero-collateral financing.
When a Secured Loan Makes Sense
If you have had past credit hiccups or need a larger funding amount than your income qualifies for on an unsecured basis, collateral helps lower the lender’s risk. Pair this with our guide to improving your credit score to graduate to prime unsecured loans in the future.