Key Insights:
- Secured loans require collateral, while unsecured loans rely on creditworthiness
- Secured loans may offer lower interest rates but come with the risk of losing collateral
- Unsecured loans typically provide quick access to funds without the risk of losing collateral
When exploring loan options, you may have the option to choose between a secured and unsecured loan. Each type of loan has unique features, benefits and risks that can impact your decision, so it’s important to understand the differences.
Understanding the differences between an unsecured vs. secured loan
The biggest difference between secured and unsecured loans is whether they require collateral.
Secured loans require collateral, such as a home or a car, to back the funds you borrow. However, if the borrower falls behind on payments, the bank or lender can take possession of the collateral to cover their costs.
In contrast, unsecured loans don’t require collateral. Instead, lenders rely on other factors to determine your eligibility, including your creditworthiness.
Types of unsecured loans
Different types of unsecured loans meet different financial needs:
- Personal loans: Personal loans can be used for many reasons, including debt consolidation, major purchases or planning a large event, like a wedding. Depending on each lender, both secured and unsecured personal loan options exist, but personal loans are typically unsecured.
- Student loans: Student loans are designed specifically to help cover education costs.
- Credit cards: Credit cards are revolving loans that allow you to borrow money as needed, up to your credit limit. Most credit cards are unsecured.
Types of secured loans
Lenders may offer secured loans for larger borrowing amounts. This can include:
- Mortgages: Mortgages are loans to help cover the cost of buying a home. The loan is backed by the value of the home, meaning the lender can foreclose if you default.
- Auto loans: Auto loans help pay for a car and are backed by the vehicle’s value. The vehicle can be repossessed if you default.
- Secured personal loans: Some lenders may offer personal loans that use your savings account or other assets as collateral.
Benefits of secured loans
Secured loans come with certain potential benefits, including:
- Lower interest rates: Collateral reduces the risk for lenders, which means they may offer lower interest rates.
- Higher loan amounts: Lenders may offer larger loan amounts due to the additional security provided by the collateral.
- Easier qualification: Depending on the lender, some secured loans may have more flexible creditworthiness or income requirements than unsecured loans.
Benefits of unsecured loans
Some benefits of unsecured loans include:
- No collateral required: You don’t need to put your assets at risk of repossession.
- Straightforward application process: Applications can be completed more quickly without the need to evaluate collateral.
- Faster access to funds: Without collateral to evaluate, you may receive funds within a few business days, depending on the lender.
Secured loan vs. unsecured loan: Making your decision
Secured and unsecured loans can each be a responsible borrowing option under the right circumstances. Just be sure to understand how the payment structure, terms and collateral requirements of any loan will affect your financial situation before you sign your agreement.
Citi offers personal loans to existing Citi customers and new Citi customers that meet specific eligibility criteria, including an established credit and income history, along with additional factors. If you think you could benefit from a Citi® Personal Loan, apply online today.
This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.
