What Is a Secured Loan? 

Written by:

Baylor Cox

Reviewed by:

• Jean Hopkins

Loans fall into two main categories: secured and unsecured. The key difference is simple: 

• Secured loans require collateral. 

• Unsecured loans do not. 

Collateral is something valuable like a house, car, or other asset that you pledge to the lender when you borrow money. If you fail to repay the loan, the lender can take (or seize) your collateral to recover their losses. 

Because of this, secured loans carry more risk for the borrower but less risk for the lender. 

How Does a Secured Loan Work? 

When you take out a secured loan, you agree to use an asset as collateral. For an auto loan, the vehicle you purchase becomes collateral. For a mortgage, the house you buy is collateral. If you stop making payments, the lender can repossess the car or foreclose on the home to get their money back. 

In most other ways, secured loans work just like unsecured loans: 

• You receive money up front. 

• You repay it over time with interest. 

However, the collateral requirement creates some key differences worth considering. 

Differences Between Secured and Unsecured Loans 

Here’s how secured and unsecured loans compare: 

• Interest Rates: Secured loans usually have lower interest rates. Because the lender can take your collateral if you default, they see less risk and reward you with a lower rate. 

• Loan Amounts: Lenders are often willing to offer larger loan amounts on secured loans. The collateral backs the loan, which gives them confidence in your ability to repay. 

• Approval Time: Secured loans can take longer to process. The lender must verify the value of the collateral before approving the loan. 

• Risk to Borrower: If you can’t repay a secured loan, you risk losing your collateral. With an unsecured loan, you don’t lose property, but you could face damaged credit or collection efforts. 

If you plan to buy an expensive item, you will most likely need a secured loan. The item itself often becomes collateral. 

If you already own an asset, you might also use it as collateral to get a lower interest rate than you would qualify for with an unsecured loan. 

Secured vs. Unsecured Lines of Credit 

A good way to see the difference is by comparing two common types of revolving credit: 

• Credit cards are unsecured lines of credit. You don’t provide collateral, and you can borrow only what you need up to your credit limit. 

• Home equity lines of credit (HELOCs) are secured lines of credit. Your home acts as collateral, so the lender has a claim on your house if you stop making payments. 

Common Types of Secured and Unsecured Loans 

Secured Loans 

• Mortgage – Your home serves as collateral. 

• Auto loan – Your car serves as collateral. 

• HELOC – Your home serves as collateral. 

• Secured personal loan – You use savings or other assets as collateral. 

Unsecured Loans 

• Credit cards – No collateral. 

• Personal loans – Typically, unsecured unless otherwise stated. 

• Student loans – No collateral. 

• Small business loans – Often unsecured, but some lenders may require collateral for large amounts. 

Why Lenders Prefer Secured Loans 

Secured loans are considered less risky to lenders because they have a safety net. If the borrower fails to repay, the lender can sell the collateral to recover their losses. 

This lower risk is why secured loans often come with: 

• Lower interest rates 

• Higher borrowing limits 

• More flexible repayment terms 

In contrast, unsecured loans rely entirely on the borrower’s creditworthiness, which increases the lender’s risk and usually leads to higher interest rates and lower borrowing limits. 

Key Takeaways 

• Secured loans require collateral; unsecured loans do not. 

• Lenders see secured loans as less risky, so they often offer better rates and higher amounts. 

• If you don’t repay a secured loan, you could lose your collateral. 

• Credit cards and student loans are unsecured; mortgages and auto loans are secured. 

• Personal loans and small business loans can be either, depending on the lender and loan terms. 

• Understanding the difference between secured and unsecured loans can help you choose the right borrowing option for your financial situation—balancing risk, interest rates, and how much you need to borrow.