What is an Unsecured loan vs a Secured loan?

When thinking of getting an online personal loan, there are two types you can get: And unsecured loan and a secured loan. In this article I am going to go through the advantages and disadvantages of both.

The main difference between them is the collateral of the loan. A secured loan requires collateral while an unsecured loan does not require any.

The collateral – something used as security against non-repayment of the loan.

Secured Loan – a loan that is tied to collateral (Your house, car, investments, savings, or future paychecks)


  • The interest rate is lower on these types of loans because they are tied to collateral that you own or have partial ownership in such as your house or car.

  • These loans are a little easier to get approved for because you have something tied to the loan that gives the lender security.


  • You can only get the amount that you own in your asset or how much it is worth. For example, if your car is worth $3,000 you can only take out a loan for $3,000.

  • If you default on your loan, the loan company now has rights to your car or home and can repossess it from you.

  • The process requires title documents and signing over your assets

There are less common loans secured with your investment accounts. The disadvantage here is if the market dips, then you may be called upon to make extra payments to make up the difference.

Loans can also be secured by a savings account. You will end up losing money because of the interest you have to pay on them. It may be better for you to use your savings instead of getting a personal loan. (Remember you can always save more money).

Loans secured from your future checks are usually for a much smaller amount, that can be covered by your next paycheck. Your employer may be the one to offer these types of loans or a cash advance company.

Unsecured Loan – a loan that is given to you without needing any collateral.


  • You get money deposited into your account and you can use it however you like.

  • There is no collateral associated with it so, if you don’t own a car or home, you can still qualify for the loan.

  • A personal loan looks better on your credit than revolving credit (Credit card balances). If you can’t pay off your credit cards the way you want, an online personal loan for bad credit can help you get rid of revolving credit.

  • The interest on an unsecured personal loan is calculated by using simple interest which means they only charge you interest on the principle, unlike credit cards where they charge you interest on the principle and on the interest that occurs each day.

  • There are no prepayment penalties when paying off an unsecured loan. You only pay interest for the time you have the loan for.

  • Unsecured installment loans have an end date, the payments that you make will make sure your loan is paid off in the time of your loan term. Credit cards have it set up where making the minimum payment could keep a balance on your credit card for years and years to come making it harder and harder to get out of debt and charging you a lot in interest.


  • More checks to your credit and your finances may be made to see your eligibility. This may include a hard pull to your credit, checking your banking information, employment and other lifestyle aspects to determine your credit worthiness.

  • Online personal loans for bad credit tend to have higher interest rates than secured loans. Depending on your FICO score the interest rate may be higher than your credit card interest rate.

  • If you do not make your payments to these loans, they can ruin your credit score.

I hope this article helped you understand the difference between the personal loan types and helps you in making better financial decisions. For more advice about online personal loans please read our article about How to get an online personal loan with bad credit.

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