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Secured vs. Unsecured Loans

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When you're looking to borrow money, there are two main types of loans to be aware of: secured and unsecured loans

We'll review the key differences between secured and unsecured loans so you can understand which kind of loan is best for you.

What is an unsecured loan?

An unsecured loan is a loan that does not require you to put up items you own, such as your car or home, as collateral to qualify for the loan. Instead, an unsecured loan is issued based on the borrower’s creditworthiness and ability to pay.

Creditworthiness is a term used in the loan world. Basically, it means the collection of factors a lender takes a look at to determine the likelihood that a borrower will default on his/her loan. Typically, your creditworthiness takes factors like your credit history, credit score and income into account.

For an unsecured loan, the lender is taking on a bigger risk by giving money to the borrower without collateral.

Personal loans are generally unsecured loans.

Personal loans: You can apply for a personal loan from a bank, credit union or online lender like Marcus, which has a personal loan offering. Depending on the terms, you can use a personal loan for a variety of purposes . (For example, Marcus personal loans can be used for consolidating credit card debt or to pay for a home renovation).

 

What is a secured loan?

A secured loan requires you to put up items you own, such as your car or home, to qualify for the loan. These assets, known as collateral, can be seized by your lender if you default on your loan. Collateral provides protection to a lender because, in the event that you fail to pay back the loan, the lender may collect and sell the collateral used to secure the loan.

Yes, they actually have the right to do that.

If you default on a secured loan, the lender has the right to collect the collateral and sell it, and the sale’s proceeds are used to pay off your outstanding balance. If your outstanding balance is higher than the amount received from the sale of your collateral, then the lender can take legal action against you to collect the amount of your loan that is still unpaid.

Losing your home or other possessions is typically not something anyone wants to happen to them.

Some examples of secured loans are:

Auto loans:

These loans can be used to buy a vehicle, with the purchased vehicle serving as collateral for the loan. If you fail to pay back the loan, the lender has the right to take back the car, which, if you’re someone with an hour-long commute, isn’t a good thing. If you are in the market to buy a car, you can learn more about a good credit score to buy a car here.

Mortgages: 

Mortgages are loans used to make a real estate purchase in which the loan is secured by the property you are buying. If you fail to pay back the loan, you could lose your property to the lender. If you are in the market to buy a house, learn more about the credit score needed to buy a house.

Home equity loan:

A home equity loan (kind of like a second mortgage) allows you to borrow against the value of your home. You could get 80-85% of your home’s appraised value to pay for various costs, like college tuition, home renovations and more. A home equity loan is a type of installment loan with fixed interest payments for a set term. This is a secured loan because if you can’t pay it back, the lender can seize your home.

Home equity line of credit:

A home equity line of credit is similar to the home equity loan in that it is secured by using your home as collateral. However, unlike the home equity loan, a home equity line of credit is more similar to a credit card, in that you can be approved for a certain limit and use that as a revolving credit line. Learn more about home equity.

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Secured loans vs. unsecured loans

Though they are both options for borrowing money, secured loans and unsecured loans each have their pros and cons.

One of the major differences between the two loan types is what happens if you fail to make your payments.

If you stop paying a secured loan, the lender has the right to seize the collateral that you used to secure the loan.

For an unsecured loan, the lender does not have access to any collateral, so in the event of a default a lender’s options to collect the sums owed are more limited.

No matter what kind of loan you choose, you’ll end up having to pay interest. For an unsecured personal loan for example, your interest rate is determined by numerous factors, including how good your credit score is and your credit history. If you have good credit (a credit score of 660+), you could qualify for a lower interest rate. If you have a lower credit score, you’re likely going to get loan offers with higher interest rates.

What type of personal loan is best for you?

There is a lot to consider when deciding between a secured personal loan and an unsecured personal loan. 

If you’re someone with not-so-hot credit or you’re trying to rebuild your credit and don’t qualify for an unsecured personal loan, a secured personal loan may be a decent option for you, since it is easier to qualify for - so long as you have something to secure the loan with. 

But if you are worried about putting up an asset as collateral to be approved for a secured personal loan, an unsecured loan could be a better option, since it’s less risky.

Personal loans generally have fixed payments, which means consolidating debt or financing a wedding could be easier since you’re able to budget your payments better compared to credit cards. 

At the end of the day, whichever loan you need depends on your unique situation. Do your research and make sure that you’re comfortable with your options. Once you’ve decided which type of loan is best for you, head on over to that lender and apply.

This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.