Each lender may have different requirements for the type of collateral needed. In addition, the amount of collateral value you may need depends on the type of loan. For example, for a CD or savings secured loan, a lender may require a CD or savings account with a dollar value that matches the loan to be held as collateral.
As with all loans, there are pros and cons. Some of the advantages of secured loans include:
- They may be easier to access. Since your collateral reduces the risk for the lender, it may be easier to get approved for a secured loan when your credit score is lower or if you have little to no credit history.
- Interest rates may be lower. This may help make your monthly payments more affordable.
- They can help you build credit moving forward. As with most types of credit or loans, making on-time payments can help you build your credit for future borrowing needs. Because secured loans may be easier to access compared to unsecured loans, they may be a good way to build credit history from scratch or improve your score.
Some of the disadvantages of secured loans include:
- You could lose your collateral. If you default on your loan, you could be at risk of losing the collateral you used to secure the loan.
- Missing payments can hurt your credit. Missing payments on any loan—secured or unsecured—can hurt your credit.
What are unsecured loans?
Unsecured loans can be used for debt consolidation, home improvement projects, or emergency expenses like a vehicle repair. In contrast to secured loans, they don't require collateral to be approved. Instead, lenders rely on your credit history, income, outstanding debt, and other factors to determine if you're approved.
For the borrower, unsecured loans may be less risky because there's no collateral to lose. But that comes with trade-offs, including the potential for higher interest rates and the need for good or great credit.
Some of the advantages of unsecured loans include:
- They may have a quicker approval process (and give you faster access to funds). Since there’s no valuation of collateral, the approval process can be much quicker, depending on your credit score and credit history.
- No collateral is required. Your home or car isn't hanging in the balance if you default on your loan. This may help you feel less stressed about borrowing money.
Some of the disadvantages of unsecured loans include:
- It may be harder to get approved. Lenders consider your credit score, credit history, income, and debt. If you don’t have a solid credit history or your debt-to-income ratio looks risky, you may not be approved.
- They have potentially higher interest rates. Without collateral, lenders are exposed to more risk. In turn, they may charge higher interest rates.
- Borrowing limits may be lower. Lenders may limit how much money they’ll let you borrow without collateral. So if you’re planning home renovations, for example, you’ll want to make sure that your project budget fits within the amount of the loan. If you have significant equity in your home, however, you may have better chances of funding your project with secured lending options like a home equity loan or line of credit (also known as a HELOC).
