The Difference Between Secured and Unsecured Personal Loans

Personal loans allow you to borrow money directly from your financial institution for any purpose. Personal loans come in two types — secured and unsecured.

In this blog, we explore how each of these loan types works, their similarities, and some of the important differences between them. Read on to learn more about secured vs. unsecured personal loans.

Is a Personal Loan Secured or Unsecured?

With a personal loan, you receive a lump sum payment right into your pocket to spend on almost anything you wish and pay it off over time. So far so good, but the money you borrow can be either secured or unsecured, meaning that your lender may or may not require you to put up separate funds or an asset as a guarantee that you will pay off your loan.

What Is a Secured Personal Loan?

A secured personal loan, or specifically a deposit secured loan, allows you to borrow money against funds you already have in a checking or savings account or a share certificate account. You effectively pledge this money as collateral for the full term of your secured loan. When your loan is paid in full, you’ll get access to your funds again.

It might sound a little strange to be using money to borrow more money. But, you are actually leveraging the money you have to limit the risk a lender will need to take on as you build a track record for making loan payments in full and on time.

This type of loan makes sense if you:

Want access to more funds while keeping your savings intact
Are at the beginning of your financial journey and want to start building your credit
Need to turn your credit around after making a few mistakes

What Is an Unsecured Personal Loan?

An unsecured personal loan means you can borrow a lump sum of money for a variety of purposes, and your credit union doesn’t hold any of your assets as collateral for your loan.

This type of loan makes sense if you:

Want access to funds at a low annual percentage rate (APR)
Have an established financial history
Have a good credit score

You’ll be able to borrow money at a lower rate than other forms of personal lending, such as a credit card or line of credit. However, a secured loan will normally give you the lowest possible interest rate in return for putting up collateral.

Similarities Between Secured vs. Unsecured Loans

Secured and unsecured loans are both direct personal loans and share many similarities. These include:

1. How You Can Use Your Personal Loan

Both types of loans can be used for just about anything you want. You will need to give your credit union a general idea of how you plan to use the funds.

Common uses for personal loans include:

House repairs or renovations
Replacing appliances or buying furniture
Car repairs or car purchase (though you could also get an auto loan!)
Health care bills
A vacation or a family event like a wedding
Debt consolidation, for example, using your loan to pay off high-interest credit cards

2. Equal Monthly Payments

You’ll make the same payment each month for both secured and unsecured personal loans. The amount you pay will depend on how much you borrow (the loan principal), your loan term, and the APR you are offered.

Having the same monthly payment can make budgeting easier than for a credit card, which usually has different payment amounts due each month based on your outstanding balance.

3. Building Credit

When comparing a secured vs. unsecured personal loan, there’s no difference in how much the loan will help boost your credit. You should, however, keep these points in mind with both types of personal loans:

You must make your loan payments on time each month to improve your credit score.
It will take at least a few months to see a positive change in your credit report.
Missed payments will hurt your credit.

4. A Range of Loan Terms

You’ll most likely be able to choose how long you borrow money no matter whether you get a secured or unsecured personal loan.

A typical range for a personal loan is 12 to 60 months. Make sure you choose a term that gives you an affordable monthly payment for your budget, while also getting the best interest rate possible.

A shorter loan term means you have a higher monthly payment but you pay less total interest over the life of the loan.
A longer loan term means you’ll have a lower monthly payment.
People with lower credit scores might not be offered the longest loan terms, as there is more chance your finances will change in that time, and you may default on your loan.

Secured vs. Unsecured Personal Loans Differences

That said, secured and unsecured loans have some very important differences. These include:

1. Collateral

With a secured personal loan, such as Freedom Credit Union’s Shared Secured Loans, your credit union uses your savings as collateral for the loan. But with an unsecured personal loan, you don’t have to put up any funds or assets to secure the loan.

2. Credit Score

You can usually qualify for a secured personal loan with a lower credit score than an unsecured one. That’s why a secured personal loan is a great option if you’re just starting out or looking to improve your credit history.

3. Interest Rate

An unsecured personal loan generally comes with a higher rate than a secured loan. This is because no collateral backs the loan, and your lender could be taking on more risk if you have a lower credit score.

For secured personal loans, Freedom Credit Union has a fixed set rate for everyone, which is 2% above the rate you earn on the savings or checking account balance, or certificate you are pledging, with a minimum of 7% APR.

The following table summarizes the key similarities and differences between secured and unsecured loans.

Secured and Unsecured Personal Loans – Similarities and Differences

	Secured Personal Loan	Unsecured Personal Loan
Collateral	Requires collateral (e.g., funds in a savings, checking, or certificate account).	No collateral is required.
Credit Score	Easier to qualify with a lower credit score.	Requires a good credit score and an established financial history.
Interest Rate	Lower APR (fixed rate often tied to pledged funds).	Generally higher APR compared to secured loans.
Loan Purpose	Almost any purpose, such as home repairs, debt consolidation, or medical bills.	Same
Monthly Payments	Equal monthly payments throughout the loan term.	Equal monthly payments throughout the loan term.
Building Credit	Helps build or improve credit score with on-time payments.	Same
Loan Term Options	Offers flexible terms (typically 12 to 60 months).	Same
Eligibility	Ideal for borrowers with no or low credit, or those looking to rebuild credit.	Ideal for borrowers with good to excellent credit.
Risk to Borrower	Risk of losing collateral (e.g., savings) if payments are not made.	No direct asset risk, but missed payments harm credit score.

Choosing the Right Loan for You

Deciding whether a secured or unsecured loan is best for you is a personal decision based on your financial situation, including your savings, credit score, risk tolerance, and how much money you want to borrow and for how long.

It’s worth working with a trusted loan partner like Freedom Credit Union with experience in both secured and unsecured lending. We offer:

Low rates
No fees
Friendly, local service

We also offer our members a fixed set rate on all our secured loans of 2% above the rate you are earning on the certificate you are pledging, with a 7% APR minimum, designed to make borrowing and building your credit more affordable.

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