What's the Difference Between Secured and Unsecured Loans?

Whether a loan is secured or unsecured may determine whether the borrower is approved, the amount that can be borrowed, and the interest rate that’s charged.

Knowing the difference between secured and unsecured loans may save you time and money. We’ve provided key information that you need to know and summarized the advantages and disadvantages of each type of loan.

Table of contents

• What is an unsecured loan?
• What are examples of unsecured loans?
• What are advantages of unsecured loans?
• What are disadvantages of unsecured loans?
• What is a secured loan?
• What are examples of secured loans?
• What are advantages of secured loans?
• What are disadvantages of secured loans?
• Secured vs. unsecured loans: Which is right for you?

What is an unsecured loan?

An unsecured loan is a loan that is not backed by collateral like a house, car, or other asset. It is sometimes called a signature loan, because approval is primarily based on your promise to repay the money. Unsecured loans are available for various reasons, such as debt consolidation, home improvements, or unexpected expenses. Approval for an unsecured loan relies partly on your overall credit history.

What are examples of unsecured loans?

There are many types of unsecured loans that can be used for different purposes. Here are some of the most common types of loans:

• Student loans
• Credit cards
• Medical loans
• Buy now, pay later loans
• Personal loans

What are advantages of unsecured loans?

These are some of the main advantages of an unsecured loan:

• You don’t need to have a valuable asset to guarantee the repayment of the funds.
• You don’t risk the loss of any property if you default on the loan.
• Your loan approval may be quicker because there are no assets to evaluate. With Discover® Personal Loans, for example, funds can be sent as soon as the next business day after your acceptance.
• The funds borrowed can be used for any purpose.
• The application process may be simpler for smaller purchases. Discover offers personal loans from $2,500 to $40,000.

What are disadvantages of unsecured loans?

Here are possible disadvantages of an unsecured loan: 

• No collateral might mean that you pay a higher interest rate, because the risk may be greater for the lender. A strong credit score may reduce this disadvantage.
• The repayment term may be shorter than for some secured loans. Some lenders may offer flexibility: Discover Personal Loans, for example, offers loan repayment terms from 36 to 84 months.
• The amount that can be borrowed may be less than you need. For amounts over $40,000, for example, a loan secured by an asset might be required.

What is a secured loan?

A secured loan is a loan that requires you to use an asset as collateral. The value of the asset may need to be equal to, or exceed, the amount you request to borrow. Common assets are homes, cars, savings, or investments.

What are examples of secured loans?

Secured loans are typically used for larger loan amounts. They may also be required if the borrower has either a limited or poor credit history. These are types of secured loans:

• Mortgages
• Auto loans
• Home equity loans and home equity lines of credit (HELOC)
• Secured credit cards

What are advantages of secured loans?

Here are some advantages of secured loans:

• You may be able to borrow larger amounts of money.
• Lenders may offer longer repayment terms.
• You may receive a lower interest rate because the collateral reduces risk to the lender.
• It may be easier to be approved because there is an asset backing the loan.

What are disadvantages of secured loans?

These are possible disadvantages of a secured loan:

• You could lose your collateral (such as your car or your house or other property) if you default on the loan.
• Secured loans may have additional restrictions. These could include a minimum balance in a bank account, a minimum value of an investment or an asset, or a lack of flexibility on the use of the loan.
• The loan approval may take longer, while the value of your collateral is verified.

Secured vs. unsecured loans: Which is right for you?

The choice between a secured or unsecured loan primarily depends on what you need the money for and the requirements of the lender. If your goal is to consolidate or pay down high-interest debt, an unsecured personal loan may be the right option for you.

An unsecured personal loan from Discover has many advantages—including fixed interest rates, flexible repayment terms, and same-day decisions in most cases, plus funding up to $40,000. If an unsecured loan to pay for a major expense or to consolidate high-interest debt is right for you, we offer tips on how to apply.

At Discover, you can also design your loan around you. Pick the amount you need and the repayment term from options offered to fit your budget. There are flexible repayment terms for all loan amounts—36, 48, 60, 72, and 84 months.

If you’re interested, our 100% U.S.-based loan specialists can walk you through our available repayment terms, so you can select the one that meets your financial goals.

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