The pros & cons of secured and unsecured personal loans

The pros & cons of secured and unsecured personal loans

If you need more financial flexibility, you might be thinking about taking out a personal loan. But with so many types of personal loans available, it can be tough to tell which will best fit your needs — and your budget. How you plan to use the money, how long it will take you to repay the loan and your personal credit history are just a few of the factors you’ll need to consider to make the right choice.

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Secured vs. unsecured: what’s the difference?

You’ll also want to understand the different financing options available to you, including secured and unsecured personal loans. Secured loans are backed by collateral, such as a house, a certificate of deposit, or a car, while unsecured loans are offered based primarily on your personal creditworthiness. Weigh these pros and cons to determine which path is best for you. 

Pros and cons of secured personal loans 

When you need to borrow a large amount of money for a major purchase or expense, a secured loan is a good bet. Common types of secured loans include home mortgages, vehicle loans and home equity loans or lines of credit. Some lenders also offer secured credit cards that are backed by cash that’s deposited into the lender’s account. The collateral you use to back a secured loan protects the lender, who will repossess your property if you fail to repay the loan.

Pros: The collateral used to secure a personal loan offers an extra layer of protection for the lender. That means lenders are more willing to offer secured loans to borrowers with lower credit scores. They’ll also generally offer lower interest rates and larger loan amounts when there’s collateral on the table. Although that’s not necessarily true for all types of secured loans; super-fast funding methods, such as payday loans or car title loans, can have sky-high interest rates. Read more about the dangers of these kinds of loans on the Center for Responsible Lending’s website.)

Cons: The biggest downside of taking out a secured loan is the risk of losing your deposit or your property if you fail to make on-time payments. Each loan will have its own stipulations, and some give lenders the right to repossess your property, without notice, as soon as the loan goes into default. 

Once your property has been repossessed, you’ll have to work with your lender to repay and reinstate your loan — or try to buy your stuff back at auction. And if your property doesn’t sell for the full amount that’s owed, the outstanding balance could still be sent to a collection agency. 

Pros and cons of unsecured personal loans

For smaller purchases or short-term influxes of cash, unsecured loans often fit the bill. However, the amount you can borrow with an unsecured loan is limited by your personal financial history, including your credit score and your monthly income. Personal loans, student loans and credit cards are the most common types of unsecured loans.

Pros: If you qualify, getting an unsecured loan is often a quick and easy process. They also come with fewer fees, as there are no property assessments or title management services required. And while a missed payment will negatively impact your credit rating, you don’t run the risk of losing your collateral like your home or car. Unsecured personal loans also typically come with fixed interest rates and repayment schedules and can be used to finance almost anything.

Cons: Unsecured loans generally come in smaller amounts — and have higher interest rates and credit score requirements. The convenience may be worth the cost, but interest charges can rack up quickly. And just because an unsecured personal loan doesn’t put your collateral at risk if you default, it doesn’t mean you’re off the hook. “You’re still facing the potential of being sued,” says Charles Phelan, a debt relief expert and founder of Zipdebt. “Some creditors are not very aggressive with collections, but others are.”  

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Even if debt collectors don’t wind up suing you to collect the balance you owe, they can still hound you to pay. And if you are sued, you risk having a judgment brought against you that could result in wage garnishment, a lien on your property or a levy on your bank account, Phelan says.

Related article: Help, I’ve been sued by a debt collector!

What happens if I’m late on my loan payments?

Whether your loan is secured or unsecured, any payment that’s more than 30 days late will be reported to the credit bureaus — and appear on your credit report for seven years. So regardless of what type of loan you have, be sure to plan ahead if you’re at risk of missing a payment. And always factor the cost of interest payments into any purchase you’re planning to make with the funds from your personal loan.

How Resolve can help

If you’re dealing with debt and not sure what to do, create a free account with Resolve to see what your options are. Or, you can speak with one of our experts for free. Just send us a message.

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