What's the difference between Secured and Unsecured Loans?

Deciding whether you want a Secured or Unsecured Personal Loan will affect five major aspects of your financing process:

  • How much you can borrow
  • What the interest rate will be
  • How quickly you’ll be approved
  • How long you can take to pay it all back
  • The actual application and approval process itself

Here are the key differences between Secured and Unsecured Personal Loans:

Secured Personal Loans

Unsecured Personal Loans

Loan Application & Approval Process

Application is tedious, Approval process strict

Application requires less info,

Approval can be easier

How Fast?

Longer, can be weeks

Very short, usually days

Interest rates

5% to 12%

18% to 49%

Credit requirements

Good to Excellent for best rates & approval

Poor to Excellent for approval

How it affects your credit

Can Improve Credit

Can Improve Credit

Loan amount

Tens of thousands, depending on collateral value & credit rating

Generally, up to $15,000, sometimes more depending on lender

Flexibility of funds

More rigid, sometimes locked

Full freedom

Downsides

Potential to lose asset secured against loan

Higher interest rates

Repayment

Up to 60 months, can be variable payments

Up to 32 months, fixed monthly payment

Collateral options

Home, car, watches, boats, etc.

N/A

Secured Loans (aka Collateral Loans)

A secured personal loan requires that you put an asset up as collateral for your loan. You probably already have some kind of secured loan. Mortgages, title loans, car loans, and secured credit cards are all kinds of secured loans. The reason behind “securing” the financing is to reduce risk to the bank has when lending to you. In the event you miss a payment, they can collect the collateral. That said, in exchange for the collateral, the lender can then “reward” you with lower interest rates and sometimes, depending on what you offer up as collateral, get access to more funding.

One of the top benefits of a secured loan is simply the likelihood that your application will be approved. Banks see secured loans as almost risk-free to them, so if you have something to offer up as a backup (like a house, car, even jewelry or art sometimes), then a secured loan may be your best option. Another perk is the positive effect it can have on your credit score and building a credit history.

If you’ve never used credit before, putting up collateral for a small loan is a great way to get your score established relatively quickly. While many variables impact your credit rating, making loan payments on time is the best way to begin. Another benefit of a secured personal loan is, generally, access to incredibly low-interest rates. Percentages can vary, depending on the lender and what you’re offering as collateral, but the range generally falls between 4% to 12%.

Of course, the huge downside to a secured loan is clear; if you miss making payments on your personal loan, the lender can (and will) collect your collateral. You would keep the funds but lose your house (e.g. foreclosures). Defaulting on your loan also negatively impacts your credit rating, erasing one of the perks of securing your loan to begin with. The application process is also more time-consuming, so if you need money quickly, this may not be the best choice.

You also have less freedom to use the funds as you wish. If you want to use the funds for a small house renovation, then you can’t go on vacation with it instead. You also can’t use the same kind of collateral and get funding from an additional lender. If you offer your car as collateral for a personal loan with RBC, for example, you can’t also use that same car for another loan with Bank of Montreal. Underwriters will usually include that stipulation in your lending agreement.

Lastly, a warning about using a secured loan for unsecured debt; don’t do it. You’ll risk losing your collateral if you default later. Consolidating debt with a personal loan is a fine idea, but using a secured method isn’t the way to go.

Unsecured Personal Loans

Unsecured personal loans are a good choice if you don’t have anything to offer up as collateral and can manage the higher interest rate. The application process is much simpler than getting a secured loan because there is no valuation time from the creditor. It’s also very fast. Many online lenders can turn your application around within 24 hours and get your cash to you within a day or two. You also have the flexibility to spend the funds on whatever you want. Depending on the creditor, some will impose restrictions on how you spend your money, whereas with an unsecured loan, you have full freedom. Another benefit to an unsecured loan is that you’ll know exactly how much to pay every single month, so you can budget accordingly.

If you end up defaulting, you won’t lose a physical asset. Also, if things are bad enough that you must declare bankruptcy, the lender will only be able to collect a small amount back from you, if at all.

Alternatively, if you need tens of thousands to borrow, then an unsecured personal loan isn’t your best option. But perhaps the biggest challenge with an unsecured loan is the very high-interest rate due to the risk the lender is taking on, especially if your credit score is low or you have little-to-no credit history. The longer it takes you to repay it, the more you’ll end up paying to borrow.

What's the difference between an Auto Loan vs Personal Loan

An auto loan is a secured type of loan, so while you can apply for an unsecured loan and use it towards a car purchase, the likelihood of you getting approved for the required amount for an expensive purchase like a car is very small. If you did, the interest rate would be much higher than an auto loan. Additionally, an auto loan is secured and stands alone as collateral. So not only do you get a lower interest rate with an auto loan versus an unsecured personal loan, you don’t risk losing anything else. Like personal loans, too, an auto loan can improve your credit rating if you pay on time.

What’s Best for You? A Secured vs Unsecured Personal Loans

Situation 1; Credit card debt consolidation

You should get an unsecured personal loan

Let’s say you owe $20,000 across four different store credit cards, with interest rates between 20% to 24%. If you paid them off with an interest rate of 15% over three years, you’d save over $7,200!

Situation 2; Medical Bills

You should get an unsecured personal loan

You’re having a hard enough time with your health (or a loved one’s health). Don’t add to the stress of it with having to put up something you may lose that you need in the event you default.

Additionally, banks may not approve lending for medical bills.

Situation 3; Small home renovation

You should get a secured personal loan

You have a fixed goal in mind for your finances but want as low of an interest rate as possible.

Situation 5; You have zero or bad credit

You should get a secured personal loan

Credit and lending are all about trust and securing your first debt is the surest way to do that. It may not be quick, but if your goal is simply to establish credit and less-so accessing money, then this is your best option.

Situation 5; You need to buy a car

You should get an auto loan

Though an auto loan is a type of secured loan, you don’t have to put anything else up for collateral. The car you’re wanting to buy stands as its own collateral. If you default, the lender takes the car back. While that isn’t ideal, you aren’t risking any additional physical assets.

Our sister company, Canada Drives, can help if you are in the market for a car loan.

How Fresh Start Can Help you Get the Best Loan

Fresh Start offers personal loans up to $15,000 with flexible repayment options, no hidden or application fees. Protect your privacy and apply in the comfort of your own home, online or by text message! Use the money however you want, and don’t worry if your credit isn’t stellar - we’ll still give your application full consideration. Apply for a personal loan now to see how we can help.