Secured vs. Unsecured Loans

Secured vs. unsecured loans: Which to choose?

Loans fall into two categories: secured and unsecured. Secured loans require the borrower to put up collateral, such as a house or car, while unsecured loans do not. Both secured and unsecured loans can be used for different purposes. For example, a mortgage, a secured loan, can only be used to buy a home. An unsecured personal loan can be used to cover a variety of expenses.

Here’s what you need to know about secured and unsecured loans.

What is an unsecured loan?

An unsecured loan does not require collateral. Lenders rely on factors such as the borrower's creditworthiness, debt-to-income ratio and income to determine whether they qualify.

Types of Unsecured Loans

Common types of unsecured loans include personal loans, student loans and credit cards.

Personal Loans

Personal loans are usually unsecured. They allow qualified borrowers to receive a one-time lump sum that can be used for almost anything. Personal loans typically have a fixed interest rate and borrowers repay them in fixed monthly installments over a set term.

Personal loans can sometimes be called by the intended use of the funds, for example:

• Home improvement loans
• Wedding loans
• Debt Consolidation loans (personal loans you can use to pay off other debts, such as credit card debt)

Student Loans

Student loans can be federal or private, and they can be used to finance education and education-related costs.

Credit Cards

Credit cards allow you to use your credit limit to make purchases. You can also use a credit card to consolidate debt with a balance transfer or you can borrow money with a cash advance, although these transactions often come with fees and separate interest rates that can begin applying on the transaction date. Credit card debt is not secured by an asset, so credit cards are unsecured. The exception is secured credit cards, which require a security deposit that acts as collateral.

Benefits of unsecured loans

Unsecured loans offer several key benefits, including the ability to borrow money without collateral and an often straightforward application process. 

No collateral needed

When you borrow money with an unsecured loan, you don’t have to put up collateral that the lender can seize if you can’t repay your loan. Unsecured loans are accessible even if you don’t own an asset like a house or car – you only have to meet your lender’s approval factors like creditworthiness, debt-to-income ratio, age and income.

Easy application process

Because you’re not using an asset as collateral, the application process for unsecured loans can be more straightforward. Many lenders allow you to obtain an unsecured loan through a short, simple online application process.

Receive funds quickly

You can typically receive the funds for an unsecured loan relatively quickly. For example, Citi customers can get funds as soon as the same business day when they’re directly deposited into a Citi® bank account, or within 2 business days when directly deposited into a non-Citi^® bank account.¹

Risks of unsecured loans

As with any debt, there is a certain amount of risk involved with unsecured loans.

Credit

As with any loan, if you miss payments on an unsecured loan, it can affect your creditworthiness. Missing payments and defaulting can make it harder to borrow in the future.

Higher interest rates

Unsecured loans are riskier for the lender because they are not backed by any collateral. Lenders may charge higher interest rates than for a secured loan. Higher rates can also mean higher monthly payments.

Where do you get an unsecured loan?

Unsecured loans are usually offered by banks, credit unions and online lenders.

Most lenders evaluate your eligibility through an online or in-person application process. They usually require you to share personal information about proof of identity, creditworthiness and income.

What is a secured loan?

A secured loan is backed by collateral – usually an asset like a home or car – that the lender can claim if the borrower doesn’t repay the loan.

Types of secured loans

The most common types of secured loans are home loans and auto loans.

Mortgages

A mortgage is secured by the home you've purchased as collateral, and you fully own it once you pay off the mortgage.

Mortgages usually carry terms of 15 – 30 years and can be fixed- or variable-rate. Lenders determine interest rates based on factors like creditworthiness, income and debt-to-income ratio (DTI).

Home equity lines of credit

A home equity line of credit (HELOC) is an open line of credit secured by a home. You borrow against your equity during a draw period and pay that amount during the repayment period, which begins once the draw period ends. HELOCs tend to have variable interest rates.

Auto loans

An auto loan is secured by the car you’re buying. The lenders can repossess it if you default. As with a mortgage, once you pay the loan off in full, you own your car.

Benefits of secured loans

Secured loans can offer lower interest rates, are easier to qualify for and can allow you to borrow larger amounts.

Better rates

Because secured loans are backed by collateral, they are considered less risky for the lender. The lower risk allows lenders to offer lower interest rates.

Easier to qualify

Because they’re secured by collateral, some types of secured loans can be easier to qualify for. For example, it’s typically easier to qualify for a secured credit card than an unsecured credit card.

Higher borrowing limits

Secured loans may allow borrowers to borrow more because of reduced risk to the lender.

Risks of secured loans

The risks of secured loans include the potential to lose an asset and possible credit harm if you can’t repay the loan.

Loss of assets

When you take out a secured loan, you use an asset as collateral. The lender can seize this asset if you can’t repay the loan.

Credit

As with any loan, missing payments or defaulting can result in credit damage.

Where do you get a secured loan?

Like unsecured loans, most banks, credit unions and online lenders offer secured loans. The application process may take longer and involve more steps than for unsecured loans. For example, a mortgage can include an appraisal of the home’s value.

Secured vs. unsecured loans: Which to choose?

Whether you take out a secured or unsecured loan may depend on the type of purchase you’re making. To buy a home or car, you’ll take out a mortgage or auto loan, which are secured loans. But if you’re borrowing money for other purposes, there are a few things to consider when deciding on a loan. Secured loans may provide better interest rates and higher borrowing limits but come with the risk of losing your collateral. Unsecured loans, while more accessible, often carry higher interest rates and stricter approval criteria.

Understanding the benefits and risks of both loan types can help you make an informed decision that aligns with your needs. Be sure to consider your long-term financial health and ability to repay before applying.

¹If you are approved for a personal loan with Citi, you can get your funds the same day with a Citi deposit account, or up to 2 business days for a non-Citi account when using direct deposit. Or you can select to receive a check by mail in approximately 5 business days.

Citi offers personal loans to both existing Citi customers and new Citi customers that meet specific eligibility criteria, including an established credit and income history along with additional factors determined by Citi. 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.