Secured vs Unsecured Personal Loan: What’s the Difference?

A secured personal loan is a type of installment loan where you provide an asset, like a car, a house, or a savings account, as collateral. This collateral serves as security for the lender, reducing risk and often leading to more favorable terms for you.

However, if you are unable to repay the loan, the lender can take possession of the collateral to cover their losses.

Advantages of secured loans:

• Easier to qualify: Lenders are often more willing to approve applicants who offer collateral, even those with a lower credit score
• Lower rates: Loans backed by collateral usually have lower annual percentage rates (APR), which helps keep your monthly payments manageable.
• Higher loan amounts: You may be able to borrow more money, especially when backed by high-value collateral.

Disadvantages of secured loans:

• Risk of losing collateral: If you don't repay the loan, you could lose the asset you put up as collateral.
• Longer approval process: Appraising and verifying collateral can add time to the application process.

An unsecured personal loan does not require you to provide any collateral. Instead, loans are approved solely based on your creditworthiness, which includes your credit score, income, and debt-to-income ratio. Examples of unsecured loans include personal loans for debt consolidation. Because there's no asset for the lender to seize if you default, unsecured loans carry more risk for the lender.

Advantages of unsecured loans:

• No collateral required: You don't risk losing any of your assets if you can't repay the loan.
• Faster approval: Without the need to appraise collateral, the approval process can be quicker and less complicated.

Disadvantages of unsecured loans:

• Higher interest rates:  To offset the increased risk, unsecured personal loan rates tend to be higher than those offered with secured loans.
• Stricter qualification requirements: You'll generally need a good credit score and a stable income to qualify.
• Lower loan amounts: Compared to secured loans, the maximum loan amount might be lower, often limited to $50,000 to $100,000.

FYI: The Wall Street Journal has named BHG Financial the “best for large personal loans” because we offer higher loan amounts than most competitors, up to $250,000¹. This allows many borrowers to access their full requested amount or more, and use the funds to handle major expenses or consolidate multiple debts.

The following table highlights the core differences between collateral and non-collateral loans. 

For many, the decision between loan types is often swayed by the cost of borrowing and the individual’s risk tolerance. Secured loans reduce lender risk through collateral. By minimizing lending risk in this way, lenders can work with borrowers who have different credit profiles and offer more favorable terms.

A secured loan might be the right choice for you if:

• You have a valuable asset you're comfortable using as collateral.
• You have a lower credit score and need to improve your chances of approval or secure a better interest rate.
• You need a larger loan amount than you could get with an unsecured loan.
• You are comfortable with the potential risk of losing your collateral if you cannot repay the loan.
• You want to rebuild your credit history by making on-time payments on a secured loan.

Borrowers with unique financing needs and a stronger credit history may prefer to explore options that don’t require collateral. An unsecured loan could be a better fit if:

• You do not wish to put up any collateral or risk losing an asset.
• You have a strong credit score, higher income, and a solid financial history.
• You're looking to consolidate high-interest debt, like credit card balances, into a single, predictable monthly payment.
• You need quick access to funds without the added steps of collateral appraisal.
• You prefer the flexibility of a loan that doesn't limit you to loan amounts determined by the value of the asset.

If you are exploring personal loans, particularly for debt consolidation, BHG Financial can help. We understand how stressful it can be to find an affordable borrowing solution that doesn’t require collateral. That’s why we offer unsecured personal loans up to $ 250,000¹, specifically designed for borrowers who want to secure financing at a low fixed rate. 

When you explore options with us, there's no impact on your credit score to view personalized loan estimates.³

• Longer terms for lower payments. This flexibility helps keep your monthly payments manageable, even for larger loan amounts. BHG offers extended terms up to 10 years.^1,2
• Fixed rates for more predictability in your repayment plan. Your rate won’t change, regardless of what happens in the macro economy. Plus, prime borrowers often qualify for more favorable loan terms due to their prime credit.

Ready to see what’s possible? Use our quick and easy payment estimator to get your personalized loan estimate in just seconds.

Can you convert a secured loan into an unsecured loan?

In most cases, no. If you want to convert a secured loan to an unsecured loan, you will likely need to apply for a new unsecured loan and pay off the secured one. You might choose to convert if the interest rates on the new loan are substantially lower or if you want to reduce risk by removing collateral. However, approval will still be based on your creditworthiness.

Which loan type is easier to get approved for?

Secured loans are often easier to get approved for because the personal loan qualification requirements are more inclusive, especially if you have a lower credit score or limited credit history. However, the approval process will include asset appraisal, which could extend the timeframe. Individuals with excellent credit often find it easy to get approved for unsecured loans due to their strong financial standing and the lack of required collateral.

Are unsecured loans always more expensive?

In terms of interest rates, unsecured loans are usually more expensive than secured loans because they pose a higher risk to lenders—there’s no collateral to recover if the borrower defaults. However, they aren’t always more expensive. Borrowers with excellent credit may qualify for competitive rates that can make unsecured loan terms more affordable. Consider the entire cost of the loan when comparing. A secured loan might have lower interest rates, but it could involve appraisal fees for the collateral or shorter repayment terms that increase your monthly payment. 

What kind of collateral is usually required?

While the specific type of collateral accepted will vary by lender, common types of collateral for secured personal loans include vehicles, boats, RVs, real estate, and savings or investment accounts.

How does default affect each loan type?

Defaulting on either type of loan negatively impacts your credit score, but the consequences differ. With secured loans, the lender can seize the pledged collateral (e.g., car or home) to recover losses, in addition to reporting the default to credit bureaus. For unsecured loans, since there’s no collateral, lenders may pursue collections, lawsuits, or wage garnishment to recover the debt. In both cases, defaulting significantly affects your future borrowing ability and increases long-term financial strain.