Secured loans rely on collateral to help guarantee that a loan will be repaid, while unsecured loans rely solely on the borrower's creditworthiness.

Whether a loan is secured or unsecured may determine whether the borrower is approved, the amount that can be borrowed, and the interest rate that’s charged.

We’ve provided key information and summarized the advantages and disadvantages of each type of loan, so you can confidently know the difference between secured and unsecured loans. 

Table of contents

What is an unsecured loan?

An unsecured loan is a loan that is not backed by collateral like a house, car, or other asset. It is sometimes called a signature loan, because approval is primarily based on your promise to repay the money. Unsecured loans are available for various reasons, such as debt consolidation, home improvements, or unexpected expenses. Approval for an unsecured loan relies partly on your overall credit history.

What are examples of unsecured loans?

There are many types of unsecured loans that can be used for different purposes. Here are some of the most common types of unsecured loans:

  • Student loans
  • Credit cards
  • Medical loans
  • Buy now, pay later loans
  • Personal loans

What are advantages of unsecured loans?

These are some of the main advantages of an unsecured loan:

  • You don’t need to use an asset as collateral to guarantee the repayment of the funds and won’t have the risk of any loss of property if you default.
  •  Your loan approval may be quicker because there are no assets to evaluate. With Discover® Personal Loans, for example, funds can be sent as soon as the next business day after your acceptance.
  • The funds from an unsecured loan borrowed can be used for any purpose, from home improvements to debt consolidation and more.
  • The application process may be simpler for smaller purchases, you may even be able to apply online from the comfort of your home. Approval could come quicker since your lender isn’t evaluating any collateral. Discover offers personal loans from $2,500 to $40,000.

What are disadvantages of unsecured loans?

Here are possible disadvantages of an unsecured loan: 

  • No collateral might mean that you pay a higher interest rate, because the risk may be greater for the lender. But if you have a strong credit score you could significantly reduce the interest rate. Your lender will take your full credit health into consideration when you apply and a higher credit score means a lower rate.  
  • The repayment term may be shorter than for some secured loans. Some lenders may offer flexibility: Discover Personal Loans, for example, offers flexible loan repayment terms from 36 to 84 months.
  • The amount that can be borrowed may be less than you need. For amounts over $40,000, for example, a loan secured by an asset might be required.

What is a secured loan?

A secured loan is a loan that requires you to use an asset as collateral. The value of the asset may need to be equal to, or exceed, the amount you request to borrow. Common assets are homes, cars, savings, or investments.

What are examples of secured loans?

Secured loans are typically used for larger loan amounts. They may also be required if the borrower has either a limited or poor credit history. These are types of secured loans:

  • Mortgages
  • Auto loans
  • Home equity loans and home equity lines of credit (HELOC)
  • Secured credit cards

What are advantages of secured loans?

Here are some advantages of secured loans:

  • You may be able to borrow larger amounts of money.
  • Lenders may offer longer repayment terms.
  • You may receive a lower interest rate because the collateral reduces risk to the lender.
  • It may be easier to be approved because there is an asset backing the loan.

What are disadvantages of secured loans?

These are possible disadvantages of a secured loan:

  • You could lose your collateral (such as your car or your house or other property) if you default on the loan.
  • Secured loans may have additional restrictions. These could include a minimum balance in a bank account, a minimum value of an investment or an asset, or a lack of flexibility on the use of the loan.
  • The loan approval may take longer, while the value of your collateral is verified.

Secured vs. unsecured loans: Which is right for you?

The choice between a secured or unsecured loan primarily depends on what you need the money for and the requirements of the lender.

Here’s a look at some key differences between secured and unsecured loans:

 

Unsecured Loan

Secured Loan

Is collateral required?

No

Yes, common assets used are savings accounts, cars, homes, or investments

What’s the typical interest rate range?

Will vary based on your credit health, but are higher than secured loans due to the increased risk for lender

Often lower than unsecured loans

How much are the loan amounts?

Often less than a secured loan

 

Often more than an unsecured loan since there’s collateral involved

What’s the approval criteria?

Lenders will look at your credit score, income, and debt

Your chance of qualifying with a lower credit score is higher since you use collateral

What’s the risk if I don’t pay?

Will negatively impact your credit score

Will negatively impact your credit score, and lender could repossess your collateral

What are some common examples?

Student loans, credit cards, medical loans, personal loans 

Mortgages, auto loans, home equity loans, secured credit cards 

For example, if your goal is to consolidate or pay down high-interest debt, and you have a strong credit score, an unsecured personal loan may offer the flexibility you need without risking any assets.

An unsecured personal loan from Discover has many advantages—including fixed interest rates, flexible repayment terms, and same-day decisions in most cases, plus funding from $2,500 to $40,000. If an unsecured loan to pay for a major expense or to consolidate high-interest debt is right for you, we offer tips on how to apply.

At Discover, you can also design your loan around you. Pick the amount you need and the repayment term from options offered to fit your budget. There are flexible repayment terms for all loan amounts—36, 48, 60, 72, and 84 months.

If you’re interested, our 100% U.S.-based personal loan specialists can walk you through our available repayment terms, so you can select the one that meets your financial goals.

Want to get started on your journey to your best financial future?

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Your APR will be between x and x based on creditworthiness at time of application for amounts between $2,500-$40,000 and loan terms of x-x months. For example, if you get approved for a $15,000 loan at 11.99% APR for a term of 72 months, you'll pay just $293 per month.

You must have a minimum individual or household annual income of $25,000, be over 18 years of age, and have a valid US SSN to be considered for a Discover personal loan. Loan approval is subject to confirmation that your income, debt-to-income ratio, credit history and application information meet all requirements.

Our lowest rates are available to consumers with the best credit. Many factors are used to determine your rate, such as your credit history, application information and the term you select. State restrictions may apply.

For debt consolidation, even with a lower interest rate or lower monthly payment, paying debt over a longer period of time may result in the payment of more in interest. A Discover personal loan is intended for personal use and cannot be used to directly pay any Capital One account (including any Discover or Capital One credit card), secured loan, or post-secondary education loan or expense.

If your application is approved, we will send funds after you accept the loan. Your bank or creditor may take more days to process the funds.

After you check your rate, if you move forward with an application for a new Discover personal loan, you will need to consent to a hard credit inquiry that will appear on your credit report.

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