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Secured vs Unsecured Loans: What's the Difference?

Written by Jessica Steer
If you need a personal loan, the decision to choose a secured personal loan or an unsecured personal loan is a very important one. We’ll break down the differences between both loan options, and which scenarios they're best for.
Table of Contents

    What's the difference between secured and unsecured loans?

    Deciding whether you want a secured or unsecured personal loan will affect:

    • How much you can borrow
    • What the interest rate will be
    • How easily you’ll be approved
    • How quickly you’ll receive the funds

    Here are the key differences between the two:

    Secured Personal Loans

    Unsecured Personal Loans

    Time-consuming application

    Simpler, quicker application

    Can take weeks

    Can take less than 24 hours

    Interest rates of 5%-12%

    Interest rates of 18%-49%

    Can improve credit

    Can improve credit

    Borrow tens of thousands depending on collateral value & credit rating

    Borrow up to $35,000 (generally)

    Funds usually must be for a specific purpose. 

    Full freedom to spend on whatever you want

    Can be variable payments 

    Usually fixed monthly payments

    Downside: Potential to lose asset

    Downside: Higher interest rates

    Secured loans (aka collateral loans)

    A secured personal loan requires that you put an asset up as collateral for your loan. Mortgages, title loans, car loans, and secured credit cards are all kinds of secured loans. The reason behind “securing” the financing is to reduce the bank's level of risk when lending to you. In the event you miss a payment, they can collect the collateral. When collateral is part of the agreement, the lender can offer lower interest rates and access to more funding.

    One of the top benefits of a secured loan is simply the loan approval. Since there's less risk for the lender when there's collateral (house, car, etc) involved, there's a greater chance that you'll get funded for the amount you need.

    Another benefit of a secured personal loan is, generally, access to lower interest rates. Percentages can vary, depending on the lender and what you’re offering as collateral, but the range generally falls between 4% and 12%.

    The downsides of a secured loan:

    • If you miss making payments on your personal loan, the lender can collect your collateral, meaning you would lose your home, car, or whatever you committed as collateral for the loan.
    • Furthermore defaulting on your loan negatively impacts your credit rating, erasing one of the perks of securing your loan to begin with. You see, any kind of installment loan product is a great way to raise your score relatively quickly, and making loan payments on time is a behaviour that is rewarded with a better credit score.
    • The application process for a secured loan is also more time-consuming than an unsecured loan since there are usually more security and valuation checks, so if you need money quickly, this may not be the best choice.
    • It goes without saying, but you also can’t use the same kind of collateral and get funding from an additional lender. If you offer your car as collateral for a personal loan with RBC, for example, you can’t also use that same car for another loan with Bank of Montreal. Underwriters will usually include that stipulation in your lending agreement.

    Lastly, a warning about using a secured loan for unsecured debt; don’t do it. You’ll risk losing your collateral if you default later. Consolidating debt with a personal loan is a fine idea, but using a secured method isn’t the way to go.

    Unsecured personal loans

    Unsecured personal loans are a good choice if you don’t have anything to offer as collateral and can manage a higher interest rate.

    The application process is much simpler and faster than getting a secured loan because there is no valuation checks required. Many online lenders can turn your application around within 24 hours and get your cash to you within a day.

    Unlike a secured loan, you have the flexibility to spend the funds on whatever you want. Some lenders will impose restrictions on how you spend your money, but with an unsecured personal loan, you have full freedom.

    Obviously, the main advantage compared to a secured loan is that if you end up defaulting, you won’t lose an asset.

    On the other hand, an unsecured personal loan isn’t your best option if you need tens of thousands of dollars. Also, an unsecured loan comes with a higher interest rate due to the risk that the lender is taking on, especially if your credit score is low or you have little-to-no credit history.

    Buying a car: Auto loan (secured) or personal loan (unsecured)?

    An auto loan is a type of secured loan since the car itself acts as the collateral. And while you can apply for an unsecured personal loan and use it towards a car purchase, the likelihood of you getting approved for the required amount is less because the personal loan is not secured. And if you do get approved for the amount you need, the interest rate would be higher than an auto loan.

    So not only do you get a lower interest rate with an auto loan versus an unsecured personal loan, but an auto loan can improve your credit rating if you make all monthly payments on time.

    Scenarios: Secured or Unsecured?

    Scenario 1 - Debt consolidation

    Let’s say you owe $20,000 on multiple loan products with interest rates between 20% to 24%. If you paid them off with an interest rate of 15% over three years, you’d save over $7,200!

    Solution: You should get an unsecured personal loan.

    Scenario 2 - Vacation

    You spot a last-minute flight to South America and the deal is too good to pass up. You need $1,200 to pay for the trip today. 

    Solution: You should get an unsecured personal loan.

    Scenario 3 - Home renovation

    You have a fixed goal in mind for your finances. You need $25,000 but want as low of an interest rate as possible.

    Solution: You should get a secured personal loan.

    Scenario 4 - You have no credit or bad credit

    Credit and lending are all about trust and securing your a loan is the surest way to do that. It may not be quick, but if your goal is simply to build credit and less about accessing money, then this is your best option.

    Solution: You should apply for a secured personal loan (or credit builder program).

    Scenario 5 - You need to buy a car

    Though an auto loan is a type of secured loan, you don’t have to put anything else up for collateral. The car itself is the collateral.

    Solution: You should get pre-approved (for free) online to find out what kind of financing you're eligible for with an auto loan.

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