Is a Secured or Unsecured Personal Loan Right for You?

More people are taking out personal loans lately – whether to consolidate debt, make a large purchase, or pay for some other important transaction. The rise may be due, in part, to increased access to personal loans via online lending. The U.S. Federal Reserve puts it this way: “Although traditional lenders continue to play an important role in providing personal loans to consumers, FinTech lenders gained a notable market share [in the past decade].”¹

Although current loan-application processes are streamlined, there’s still homework to do before applying for a personal loan. What can you do to improve your chance of qualifying? How can you get the most favorable terms? One thing that can make a big difference is whether you choose a secured personal loan or an unsecured personal loan.

Personal loans are all-purpose loans from banks, credit unions, and fintechs that you pay back in regular monthly installments. They are usually categorized separately from more specific loan types, such as mortgages or student loans. 

Personal loans represent the fastest-growing debt category in the U.S., according to the Experian credit reporting agency. Overall, U.S. personal loan balances grew 19% year-over-year in the third quarter of 2022 to $519.5 billion. Experian’s research also shows more people taking out personal loans in recent years. In fact, there was a 20.5% jump in the number of people with at least one personal loan between 2021 and 2022.²

Personal loans come in two different types:

• Secured. A secured personal loan requires you to commit assets like your home or savings as collateral against non-payment. If you end up unable to make your loan payments, your assets could be seized and resold by the lender to recoup its funds.
• Unsecured. An unsecured personal loan relies on your credit history to mitigate the lender’s risk. If you can’t pay, a lender’s recourse would be to send a collection agency for the funds or to sue you, both of which could also damage your credit rating.

Most personal loans are unsecured. Borrowers’ choices between the two often hinge on their credit score and available assets. For someone with a poor credit score, putting up collateral might help them qualify for a loan they otherwise would not get. But you can only qualify for a secured loan if you have sufficient assets. Besides your home or savings, including investments and certificates of deposit (CDs), those assets could include your car or future paychecks – not to be confused with payday loans.^3,4

Secured personal loans are less risky for lenders, so they usually have lower interest rates and are easier to get approved – including for higher amounts and longer terms. Unsecured personal loans put borrowers at less risk, since their home, car, or other valuables are not at stake.^3,4 

Interest rates and lengths of personal loans vary significantly, potentially ranging from about 6% to 36%.⁵ Secured personal loans tend to come in at the lower end of the interest rate scale.^3,4 In September 2023, the Federal Reserve reported a 11.48% average interest rate on 24-month personal loans.⁶

Your credit score is likely to play an important role in your choice between a secured or unsecured loan. A borrower with a low credit score might be declined for an unsecured personal loan and then turn instead to a secured personal loan, with a greater chance of qualifying. And since secured loans often have higher borrowing limits and longer time horizons, their loan options are more flexible.