Apr 13, 2023

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Woman researching the difference between about secured and unsecured loans.

What is an unsecured loan?

An unsecured loan is not protected by collateral, like a car or a house. It can allow you to borrow money for various reasons, like to consolidate debt or pay for a wedding. The applicant’s overall credit profile, and not any collateral, plays a role in unsecured loan decisions.

Examples of unsecured loans

  • Student loans
  • Credit cards
  • Personal loans

There are many points to consider if you’re looking to pay down debt with an unsecured loan.

What is the advantage of an unsecured loan?

The main advantages of an unsecured loan include:

  • You don’t have to leverage any of your assets to secure funds.
  • Your loan approval may be completed faster because there are no assets to evaluate.
  • Unsecured loans may be a better option for borrowing smaller amounts.

What is the disadvantage of an unsecured loan?

The primary disadvantages of an unsecured loan include:

  • You may have to pay the loan back over a shorter period of time, though this depends on the lender. Discover® Personal Loans, for example, offers loan repayment terms from 36 to 84 months.
  • No collateral might mean that you pay a higher interest rate because the risk may be greater to the lender. A strong credit profile could offset this disadvantage.
  • It may be harder to get approved without collateral if you need a larger amount for debt consolidation. Again, your personal credit score and profile contribute here as well.

Discover Personal Loans understands that paying off credit cards and consolidating other high-interest debt can be challenging. That’s why we’ve made the process of applying for a personal loan as simple as possible; check out our application checklist and tips, too.

What is a secured loan?

A secured loan requires you to offer an asset as collateral, often times equal to the amount you’re requesting. The most commonly used assets are borrowers’ homes and cars, but a wide range of other valuables can be used, including cash.

Secured loans allow borrowers to request larger amounts of money, sometimes equivalent to the value of their collateral, at a reduced risk to the lender. For example if you use your car as collateral for a secured loan and it’s valued at $15,000, you may be able to request up to that amount.

Examples of secured loans

What are the advantages of a secured loan?

Some advantages of secured loans include:

  • You may be able to request larger amounts of money because of the reduced risk to the lender.
  • Some lenders offer longer repayment terms and lower interest rates than those offered for unsecured loans.
  • It may be easier to get a secured loan because of the collateral.

What are the disadvantages of an unsecured loan?

A secured loan may sound good, especially if you need a larger amount, but it can have some serious downside.

Some of the disadvantages include:

  • You could lose your collateral (such as your car or your house or other property) if you default on your loan.
  • Secured loans may have some restrictions, like a minimum balance on the bank account you use as collateral, or lack of flexibility on what you can use the money for.
  • The loan decision time may be longer since the value of your collateral needs to be considered.

Secured vs. unsecured loans: which is better?

Ultimately, the choice between a secured or unsecured loan comes down to what you need and how much risk you’re willing to assume to accomplish your financial goals. If your goal includes consolidating or paying down higher-interest debt, an unsecured personal loan may be the option that’s best for you. An unsecured loan, like a Discover personal loan, has many advantages — fixed rates, flexible repayment terms, and same-day decisions in most cases, plus funding up to $40,000. While you might be able to get more money with a secured loan, you, as a borrower, take on the risk of forfeiture of your collateral.

Discover Personal Loans works with each customer to design an unsecured personal loan based on your needs. Discover makes recommendations tailored to you, so when you apply for a personal loan online, you can be confident in your choice.

Get started on your journey to your best financial future.

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