The Difference Between Unsecured Loans and Secured Loans

loan scrabble tiles

[Photo Credit: Flickr/Chris Potter]

A personal loan is just a personal loan, right? You go to the bank, apply for a loan, and get approved. That’s all there is to it.

In actuality, it’s more complicated than that. For some of us, especially those with excellent credit, the lending process might be as simple as walking into the local branch of a bank, filling out a loan application there (or applying online), and then being approved. For those who have bad or poor credit, it becomes a challenge.

Part of the challenge comes in knowing the two most common forms of personal loans available and in deciding which type is best for your financial situation. We’ve put together the differences between unsecured personal loans and secured personal loans and the pros and cons of each, as well as what you need to know about your credit scores and credit report.

Unsecured Personal Loans

Whether they’re called consumer loans or unsecured personal loans, this loan type is the one that most people with poor or bad credit turn to. The reason for this is because there is less risk to the borrower when taking out an unsecured loan. The approval process is based on an individual’s credit and is not tied to property. A person applying for an unsecured personal loan isn’t required to use something they own — such as a home, condominium, car, boat, or other property — as collateral for the loan. Instead, the lender bases the approval on the person’s credit score and credit report. This, in turn, leads to higher interest rates for unsecured loans when compared to other types of personal loans. For many, the higher interest rates are better than putting their homes or automobiles at risk should they be unable to repay the loan for any reason.

Secured Personal Loans

Secured personal loans are what most people are familiar with as a loan — meaning, this is the kind of loan that usually comes to mind when you think of getting money for a home improvement project, planning a dream wedding, or other such expense. Secured loans can be mortgage loans, passbook loans, or a car loan. The reason why this loan type is considered secure is that it uses collateral (such as your possessions) to back the loan amount. These loans come with lower interest rates as they are of lower risk to the lender, but can be a much higher risk to the borrower. A change in employment, a sudden illness, or other unexpected life event can lead to a situation where you may become late in making your payments, or worse, start missing payments altogether. If that happens, the lender could sell your property in order to recoup the money loaned to you. While this sounds extreme, it’s a common scenario — just think back to the sub-prime lending crisis that led to the Great Recession as an example.

The Importance Of Credit

For both personal loan types shown above, credit plays an important role in being approved for the money you need. Both an unsecured loan and a secured loan rely on your credit scores and the information on your credit report. A lender uses this information to gauge whether or not you’ll be a good candidate for a loan. A lender, based on your score and your credit history, can determine if you’ll be able to make the payments on the loan you’re requesting and if you meet their requirements for the interest rate and terms you desire.

If you don’t know your credit scores, which are available from the three major credit bureaus (Experian®, Equifax®, and TransUnion®), by law you are entitled to a free copy of your credit reports every twelve months from the website. Once you have your credit report in hand, make sure you study it carefully for any discrepancies or errors. One in five Americans have mistakes on their credit reports (this infographic from Lexington Law explains more) and these mistakes can make the difference between getting the loan that you need at an affordable interest rate and not getting the money at all.

If you do happen to find inaccuracies on your credit reports, AmOne can help you locate the highest-rated company available to help you repair your credit and to work with the credit bureaus on your behalf. We have over fourteen years of experience in assisting over three million people — just like you — with their loan and credit needs. Our service is free and there is never any obligation. Call us toll-free at 1-800-809-1107 to speak with one of our knowledgeable financial search specialists to learn more.



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