A secured personal loan is backed by collateral the lender can take if you stop paying, so it can be easier to qualify for and may cost less than an unsecured loan. You carry the extra risk. Pledge only what you can afford to lose, and be cautious with any loan secured by your vehicle title.
On this page
- One idea: what happens if you stop paying
- Questions that settle it
- Typical collateral and the matching risk
- Be careful with title-style products
- What you pledge, and what you risk
- Which collateral is safest
- Questions for any secured offer
- When unsecured is the better call
- A worked example
- Final check
- Frequently asked questions
One idea: what happens if you stop paying
An unsecured loan relies on your promise to repay. A secured loan adds collateral, such as a savings account, a vehicle title or another asset, that the lender can take if you default. Because the lender takes less risk, a secured loan can be easier to qualify for and may cost less. You take the risk the lender gave up.
Questions that settle it
- Can I afford the payment without the collateral? If no, do not pledge anything.
- Would losing the asset break my life? A car you need to get to work is a different risk from a certificate of deposit you can replace.
- Is the savings account version available? Some lenders offer credit-builder loans in which payments build a savings balance; these suit people rebuilding credit.
- How is the collateral valued? Make sure you know what the lender will treat as value.
Typical collateral and the matching risk
| Collateral | What the lender can do | What to ask |
|---|---|---|
| Savings or CD held at the lender | Keep the funds if you default | Does it earn interest while pledged? |
| Vehicle title | Repossess | Is the loan payoff higher than the car's value? |
| Other property | Claim after default | Is the pledge recorded as a lien? |
Be careful with title-style products
Short-term loans secured by a vehicle title can carry very high costs and a real chance of losing the car. Your state may restrict them. If a lender wants your title for a small, short loan, read the entire agreement, compare other options and check your state's rules first.
What you pledge, and what you risk
A secured loan is backed by collateral such as a savings account, a vehicle or a piece of property. If you stop paying, the lender can take the collateral. An unsecured loan has no collateral; the lender relies on your credit and income, and the consequence of default is damage to your credit, collection efforts and possibly a lawsuit. Secured loans can carry a lower cost because the lender has an asset to fall back on, but the cost of failure is higher for you.
| Feature | Secured | Unsecured |
|---|---|---|
| Collateral | Yes | No |
| Typical cost | Often lower | Often higher |
| Approval factors | Collateral value, credit, income | Credit, income, debt-to-income |
| Risk to you | Losing the asset | Credit damage and collections |
| Speed | Can be slower (appraisal, title) | Often faster |
Which collateral is safest
Cash held in a savings account at the same institution is the lowest-risk collateral, because you lose only money you chose to pledge. A vehicle title loan is the riskiest: the car is often needed to get to work, and costs are high. Home equity is a special case with its own rules and risks; see our HELOC comparison. In general, never pledge something whose loss would cause a second crisis.
Questions for any secured offer
- What exactly is pledged, and how is it valued?
- What happens after one missed payment? Is there a cure period?
- Is the collateral insured, and who is named on the policy?
- Is the lender allowed to repossess without notice under my state's law?
- How is the collateral released when I pay off the loan, and how fast?
When unsecured is the better call
If the amount is modest and your credit is strong enough, unsecured avoids the risk of losing an asset. If your credit is thin, a secured option from a credit union can both lower cost and build history, provided you can afford the payment. The FICO factors show what scores reward: on-time payment above all.
A worked example
Say you need $5,000. A credit union offers a loan secured by a savings certificate of $5,000 you already own, with a lower rate than an unsecured option. You earn a small amount on the certificate that continues during the loan, you cannot withdraw it until the loan is paid and if you miss payments the credit union can apply the certificate to the balance. Compare that with an unsecured loan from an online lender at a higher rate. If you could cover the $5,000 from the certificate anyway, the real question is whether you want to keep the certificate untouched and pay for that choice with interest. If the certificate is your emergency fund, borrowing against it leaves you with no cushion.
Final check
If a lender asks for collateral, ask what it is worth to them and to you, and whether you could repay the loan without it.
Frequently asked questions
Does a secured loan have a lower rate?
It can, because the collateral lowers the lender's risk, but not always. Compare the written APR on both.
What is a credit-builder loan?
A small loan where the amount you borrow is held in a savings account until you repay, so on-time payments are reported while you build savings.
Can I lose my car on a personal loan?
Only if the loan is secured by the car. Unsecured personal loans do not give the lender a claim on a specific asset unless it wins a court judgment.
Does a secured loan build credit?
It can, if the lender reports payments to the bureaus. Ask before you sign.
Can a lender take my car with a personal loan?
Not with an unsecured personal loan. A title loan or a loan secured by a vehicle gives the lender that right.
What counts as collateral?
Savings, certificates, vehicles, real property or valuable equipment, depending on the lender.
Can I switch from secured to unsecured later?
Sometimes by refinancing. Ask the lender what it requires.