Secured vs. unsecured personal loans - what's right for you?
Renee Sylvestre-Williams
When you’re considering a personal loan, there are two main options: a secured loan, which is backed by collateral, or an unsecured loan, which doesn’t need collateral. There are pros and cons to both options, depending on your needs. Let’s take a look at how these loan products work.
Guide to secured and unsecured personal loans
When you apply for a loan, you can decide between a secured or unsecured loan. There are some similarities between the two: both involve money loaned by recognized financial lenders for a certain period of time, known as a term. Both charge interest and both require a credit check. What’s different are the qualifications and the needs of both.
What is a secured personal loan?
A secured personal loan is backed, or secured, with collateral. That’s an asset such as your car, house or another property that has value. If you default on the loan, the lender can seize the asset put up as collateral.
While that sounds ominous, there are advantages to getting a secured loan. Generally, since you’re putting up collateral as part of the application, the interest rate is lower compared to an unsecured loan because the lender isn’t taking a huge risk.
Plus, having collateral means you can get a larger sum of money for a longer term. This type of loan is good for bigger costs like home renovations, post-secondary education, and debt consolidation of high-interest rate debt like credit cards.
When you apply for a secured personal loan, you'll have to go through a credit check, which may affect the terms of your loans including your interest rates. You may also have to pay administration or appraisal fees. All of this can take time because the lender may have to do an appraisal of the collateral, so be prepared to wait before you get an answer.
What is a unsecured personal loan?
An unsecured loan doesn’t require collateral, but you'll have to provide proof of income, such as a pay stub, plus a bank account and a permanent residential address.
Unlike secured loans, interest rates for unsecured personal loans tend to be higher and the amount you can borrow is generally lower. Because of this, these loans are typically used for small emergencies like home repairs, or an appliance purchase.
One of the benefits of applying for an unsecured loan is that you'll get a faster response compared to a secured loan. You still have to go through a credit check, but you’ll find out if you’ve been approved within minutes or a few days.
Key differences between secured and unsecured loans
Secured loans are available from banks and online lenders. So are unsecured loans, but you can also get an unsecured loan from credit unions, private lenders or payday loans. Always read the terms and conditions as some of these lenders – like payday loan providers – may have a higher interest rate than others.