Understanding the difference between secured and unsecured loans can help you decide which option fits your financial goals. This guide breaks down how each works, the trade‑offs to consider, and what to think about before choosing.

  • Secured loans require collateral, such as a home, vehicle, or savings account, while unsecured loans do not require an asset to back the loan.
  • Secured loans may offer more favorable terms, higher loan amounts, or lower interest rates, but they also carry the risk of losing the pledged asset if you default.
  • Unsecured loans may be faster to apply for and may be a better fit if you do not want to risk collateral, though they often rely more heavily on credit score, income, and debt-to-income ratio.
  • Choosing between the two depends on your borrowing purpose, available collateral, financial profile, and comfort with risk. Compare the monthly payment, interest rate, fees, and loan term before deciding.

While secured and unsecured loans are alike in that you have to repay the loan over a period of time, there’s one key difference. With a secured loan, you must provide collateral (a valuable asset such as a home or car) as security in case you can't pay back your loan. Unsecured loans, on the other hand, don’t require any collateral.

Deciding which financing option will best meet your needs depends on the type of loan you're applying for, the lender's criteria, and your particular financial situation.

What Is a Secured Loan?

With a secured loan, you, as the borrower, pledge a suitable asset as collateral. If you default on the loan, the lender may use the collateral to settle any outstanding debt. Because the loan is backed by an asset, secured loans are generally considered lower risk, which may influence the terms you’re offered.

Some of the assets you might use as collateral include:

  • Property with equity: Equity is the difference between the amount you owe on your property and the market value.
  • A vehicle: Either the vehicle is the purpose of the loan, such as an auto loan, or you have a freehold vehicle you're offering as security.
  • Money in the bank: A savings account not pledged to another loan.

Examples of Secured Loans

Chances are, you may already have a secured loan. These are some of the more well-known examples:

  • Mortgage: When you apply for a mortgage, the contract details already include the provisions that allow the lender to take steps to take over the ownership of the property if you default on the loan.
  • Auto loan: An auto loan is similar to a mortgage in which collateral, in this case, the car, is offered by you, the borrower, as security for the loan.
  • Secured credit card: A secured credit card is helpful to those looking to build or rebuild their credit scores. Typically, with a secured credit card account, you are asked to provide funds to secure repayment of the amounts you owe on the account. The amount of the security deposit is usually the amount of your credit limit.
  • Secured personal loan: A secured loan is a personal installment loan that has a collateral element. Examples include certificate of deposit (CD) loans and stock loans.
  • Home equity line of credit (HELOC): A home equity line of credit uses the equity in your home as security. It differs from a mortgage as it's not used to purchase the home but instead uses the equity to secure a line of credit to fund something else — for instance, home renovations or buying a business.

What Are the Potential Advantages of a Secured Loan?

Although secured loans require collateral to be pledged as security for the loan, there may be some benefits to consider:

  • More favorable loan terms: You may be better positioned to obtain a longer term or a better interest rate when you have collateral to offer.
  • Higher loan amounts: The added security may allow the lender to offer higher loan amounts than with an unsecured loan.

What Are the Potential Disadvantages of Secured Finance?

Secured financing offers some benefits worth considering, but it’s also good to know what the possible pitfalls are:

  • Loss of collateral: Financial situations may change, and if this affects your ability to repay the loan, you stand the chance of losing your asset. This may be particularly financially impactful if the collateral is your primary residence or car.
  • Asset is tied up: Once an asset is used as collateral, it’s usually not available for other uses. For instance, savings or other collateral tied to a loan can’t be pledged again until the loan is paid in full.
  • Additional application processing time: Secured financing may take longer for review, as there are a few extra layers to the application. For instance, appraisers or valuers might be called to assess the asset's value.

What Is an Unsecured Loan?

An unsecured loan is a loan that doesn't require you to provide collateral.

Examples of Unsecured Loans

There are several different types to consider:

  • Credit cards: A credit card is a popular unsecured line of credit.
  • Personal installment loan: A non-revolving type of credit that pays the loan amount out in a lump sum. Borrowers repay the loan over a set timeline through installment payments.
  • Personal line of credit: A line of credit is a product that only charges interest when you use funds from it, known as the draw. It's considered revolving credit since it allows the borrower ongoing access to the funds throughout the draw period.
  • Student loans: Whether you’re applying for a federal or private student loan, these are unsecured.

What Are the Potential Advantages of Unsecured Loans?

Here are some of the possible advantages of unsecured loans:

  • No collateral required: Not everyone has assets to offer as collateral. You may also prefer not to tie up your assets. In that case, unsecured financing would likely be the better option.
  • Shorter application processing time: Unsecured loans generally have a quick turnaround time. In some cases, if approved, you may even receive the loan funds on the same day.

What Are the Potential Disadvantages of Unsecured Loans?

Unsecured loans might seem easy and quick to apply for, but they may have some drawbacks:

  • Higher interest rates: While collateral might not guarantee better interest rates, it might put you in a better position to receive one. An unsecured loan's interest rate may depend greatly on your credit score, income, and other financial factors.
  • You may not qualify based on your current financial position: If you don't have any collateral to offer, the financial institution will have to rely on other factors to determine if you are a good applicant.
  • Lower loan amounts: The risk of unsecured loans is much higher, which would make lenders less eager to grant high loan amounts.

How Your Credit Score Affects Loan Approval

Your credit score may matter for both secured and unsecured loans, but lenders often weigh it differently. With a secured loan, collateral may reduce some of the lender’s risk, which may make approval more accessible for borrowers with lower credit scores or shorter credit histories. However, credit may still affect the rate, terms, and available loan options.

Unsecured loans do not use collateral, so lenders typically rely more on creditworthiness. In addition to your credit score, loan approval criteria may include:

  • Payment history
  • Credit utilization
  • Length of credit history
  • Types of credit you currently carry
  • Recent applications for new credit

How to Choose: Secured vs. Unsecured Loans

A good place to start is the reason for borrowing. If the expense is tied to a specific asset, such as buying a home or vehicle, a secured loan may already be part of the process. If the expense is more flexible, such as consolidating debt or paying for a planned repair, the decision may depend more on credit profile, available collateral, and comfort with risk.

For example, if you want to avoid putting a vehicle, home, or savings account at risk, you may lean toward an unsecured loan if you qualify. If you're comfortable pledging an asset, you may consider a secured loan, especially if it may help with the loan amount, interest rate, or monthly payment.

Tips for Responsible Borrowing

Whether you choose a secured or unsecured loan, certain financial habits may help make borrowing more manageable.

Borrow Only What You Need

There's a chance you may be approved for more than you need, but that doesn't mean you should take it. A larger loan typically means a larger payment, and may increase the risk of default.

Understand Your Monthly Payment and Loan Terms

Calculate how much you'll need to pay each month and make sure it fits into your budget. When comparing loan options, review the repayment term, interest rate, and payment. A longer term or higher rate may cost more over the life of the loan, even if the monthly payment is lower. Also, confirm whether the loan has an early payment penalty, as this may add costs if you're able to pay it off early.

Consider the Potential Impact of Using Collateral

Before pledging an asset as collateral, carefully consider the potential risks. If missed payments result in default, the lender may seize the asset used to secure the loan. If the collateral is your home, vehicle, or savings account, this may be significant and potentially life-altering. Make sure you fully understand what's at stake and that the need to borrow warrants the risk.

Frequently Asked Questions

Should I get a secured or unsecured loan?

There are many variables to consider before making this decision, including what you need the money for, how much you need, and your current financial position.

Is a personal loan secured or unsecured?

Personal loans are available as both secured and unsecured loans, although many issued by banks are unsecured. Secured personal loans are typically backed by a savings account, CD, or other asset.

Which type of loan is right for me?

The right loan depends on the loan purpose, your financial situation, and comfort with pledging collateral. A secured loan may fit if you have an asset to pledge and want a lower rate or larger loan amount, though missed payments may put the collateral at risk. An unsecured loan may fit if you do not want to pledge an asset. However, lenders typically place more weight on credit history, income, debt, and repayment history.

Before deciding, compare the estimated monthly payment, interest rate, fees, and loan term for each option. Not sure which option is right for you? PNC Bank is here to help you think through your options. Call 1‑877‑CALL‑PNC (1-877-225-5762) to start the conversation.