Personal loans can be useful when you need to cover a large expense, consolidate debt, handle an unexpected bill, or finance a project. But before applying for a personal loan, there is an important distinction to understand: secured vs. unsecured personal loans.
A secured personal loan requires collateral, while an unsecured personal loan generally does not. That difference can affect everything from how a lender evaluates your application to your interest rate and what happens if you cannot repay the loan.
If you are comparing personal loan options in Oklahoma, understanding how secured and unsecured loans work can help you determine which type may fit your financial situation.
Table of Contents
- What Is a Secured Personal Loan?
- How Does a Secured Personal Loan Work?
- What Is an Unsecured Personal Loan?
- What Is a Signature Loan?
- Secured vs. Unsecured Personal Loans
- Benefits of Secured Personal Loans
- Benefits of Unsecured Personal Loans
- How Do Lenders Determine Personal Loan Rates?
- When Should You Consider a Secured Personal Loan?
- When Should You Consider an Unsecured Personal Loan?
- What to Compare Before Choosing a Personal Loan
- Frequently Asked Questions
- Find the Right Personal Loan in Oklahoma
What Is a Secured Personal Loan?
A secured personal loan is a loan backed by an asset that serves as collateral. The collateral provides additional security for the lender because the lender may be able to take the asset if the borrower does not repay the loan as agreed.
Secured debt is debt that has an asset attached to it. If the borrower fails to make the required payments, the lender may be able to collect the asset securing the debt.
Depending on the lender and loan product, collateral for a secured loan could include funds held in an eligible savings account, certificate account, vehicle, or another qualifying asset.
Because collateral reduces some of the lender's risk, secured personal loans may sometimes offer different rates or qualification requirements than comparable unsecured loans. However, loan terms vary by lender, borrower, collateral, loan amount, and other factors.
How Does a Secured Personal Loan Work?
When you apply for a secured personal loan, the lender evaluates both your ability to repay the loan and the collateral being offered.
For example, suppose a borrower uses eligible savings as collateral for a personal loan. The lender may place restrictions on those funds while the loan is outstanding. The borrower then makes scheduled payments according to the loan agreement until the balance is repaid.
The important thing to remember is that the collateral is connected to the debt. If you fail to repay a secured loan according to its terms, the lender may have the right to take or apply the collateral toward the unpaid debt.
That makes it important to understand exactly what property is securing a loan before signing an agreement. Federal lending rules generally require lenders to disclose security interests associated with covered consumer credit transactions.
What Is an Unsecured Personal Loan?
An unsecured personal loan does not require you to pledge an asset as collateral.
Instead, the lender evaluates factors such as your credit history, income, existing debt, and overall ability to repay when determining whether you qualify and what terms may be available.
Many personal loans fall into this category. According to the Federal Trade Commission, most personal loans are unsecured, meaning they do not require collateral such as a home or vehicle.
Like other personal installment loans, an unsecured personal loan generally provides the borrower with a set amount of money upfront. The borrower then repays the balance through scheduled installment payments over an established period. The CFPB notes that personal installment loans are commonly used for expenses such as large purchases, unexpected costs, or consolidating existing debt.
Because there is no collateral securing the loan, your creditworthiness can play an especially important role in qualifying for an unsecured personal loan and determining your rate.
What Is a Signature Loan?
A signature loan is generally another name for an unsecured personal loan.
The name comes from the fact that the loan is backed by the borrower's promise to repay rather than a specific piece of collateral. The CFPB lists signature loans among examples of unsecured debt and describes them as personal loans that rely on the borrower's signature and promise to repay.
You may therefore see lenders use terms such as:
- Signature loan
- Unsecured personal loan
- Unsecured loan
- Personal installment loan
These terms can describe similar products, but loan structures and requirements can vary. Always review the actual loan terms rather than assuming two products are identical based only on their names.
Secured vs. Unsecured Personal Loans
The biggest difference between a secured vs. unsecured personal loan is whether the borrower pledges collateral.
| Secured Personal Loan | Unsecured Personal Loan | |
|---|---|---|
| Collateral required? | Yes | Generally no |
| Backed by | An eligible asset | Borrower's promise to repay |
| Credit considered? | Yes | Yes |
| Potential risk to assets | Collateral may be at risk if the loan is not repaid | No specific asset is pledged as collateral |
| Common name | Secured loan | Signature loan |
| Repayment | Typically scheduled payments | Typically scheduled payments |
Collateral does not eliminate the importance of credit or income when applying for a secured loan. Likewise, an unsecured loan does not mean there are no consequences for failing to repay it.
If an unsecured loan goes unpaid, the lender may pursue collection activity, report information to credit bureaus when applicable, or pursue other remedies allowed under the loan agreement and law.
Benefits of Secured Personal Loans
A secured personal loan may be worth considering when you have an eligible asset available to use as collateral.
One potential advantage is that providing collateral can reduce the lender's risk. The CFPB notes that when other factors are equal, secured credit may sometimes be easier to obtain than unsecured credit.
Depending on the lender and borrower, a secured loan may also offer a different interest rate, borrowing limit, or repayment structure than an unsecured loan.
However, the tradeoff is significant: you are putting an asset at risk. Before choosing a secured personal loan, make sure you understand what is being used as collateral and what could happen to that property if you cannot make your payments.
Benefits of Unsecured Personal Loans
For many borrowers, one of the biggest benefits of an unsecured personal loan is simplicity. You do not have to pledge a specific qualifying asset to secure the loan.
That can make a signature loan useful for borrowers who need financing but do not want to tie the debt to their savings or other property.
Unsecured personal loans can also be flexible. Depending on the lender's requirements, borrowers may use personal loan proceeds for purposes such as:
- Consolidating eligible debts
- Paying for home improvements
- Handling unexpected expenses
- Covering medical or emergency costs
- Financing a major purchase
- Paying for a wedding or other event
- Covering moving expenses
Before borrowing, consider whether the expense fits comfortably within your budget once the new monthly loan payment is included.
How Do Lenders Determine Personal Loan Rates?
Whether you choose a secured or unsecured personal loan, several factors may influence the rate and terms you receive.
The CFPB notes that lenders commonly consider factors such as a borrower's credit reports and credit score when determining personal installment loan terms. Your income, existing debts, requested loan amount, repayment term, and other underwriting criteria may also affect your loan offer.
Collateral can make a difference as well. Because an unsecured loan does not provide the lender with an asset securing the debt, unsecured borrowing can present more risk to the lender. As a result, unsecured loans may sometimes have higher interest rates than comparable secured loans.
When comparing loans, don't look only at the advertised interest rate. Review the annual percentage rate (APR), repayment term, monthly payment, fees, and total borrowing cost.
Personal installment loans may include charges such as origination, documentation, late, or other applicable fees, so borrowers should review their loan disclosures carefully.
When Should You Consider a Secured Personal Loan?
A secured personal loan may make sense if you have an eligible asset that you are comfortable pledging as collateral and the secured option provides terms that work well for your financial situation.
For example, you might compare a secured loan if:
- You have savings or another eligible asset available to secure the loan.
- You are comfortable with the consequences associated with pledging that collateral.
- The rate and terms are competitive compared with your unsecured options.
- You have a reliable repayment plan.
Before using an asset as collateral, consider how losing access to or potentially losing that asset could affect your finances.
When Should You Consider an Unsecured Personal Loan?
An unsecured personal loan or signature loan may be worth considering when you qualify based on your creditworthiness and income and do not want to pledge an asset.
It may be especially appealing when you want a straightforward installment loan for a defined expense and prefer predictable payments.
However, convenience should not be the only consideration. Compare the APR, monthly payment, repayment period, fees, and total amount you will repay before accepting an offer.
Whether the loan is secured or unsecured, the goal should be to choose financing that fits your budget throughout the entire repayment period.
What to Compare Before Choosing a Personal Loan
The right loan isn't necessarily the one with the lowest monthly payment. A longer repayment term, for example, may lower your monthly obligation while increasing the amount of interest you pay over time.
When comparing secured vs. unsecured personal loans, consider:
- APR: How much will borrowing cost on an annual basis?
- Monthly payment: Does the payment comfortably fit your budget?
- Loan term: How long will you be making payments?
- Total repayment: How much will you pay by the time the loan is completely repaid?
- Fees: Are there origination, documentation, late, or other fees?
- Collateral: Is an asset required, and are you comfortable putting it at risk?
- Loan amount: Can you borrow only what you need?
- Use restrictions: Does the lender restrict how the money can be used?
Shopping around can be worthwhile because rates and terms can vary among financial institutions. The CFPB recommends reviewing loan disclosures and comparing offers to understand the full cost of a personal installment loan.
Frequently Asked Questions
What is the difference between a secured and unsecured personal loan?
A secured personal loan requires collateral, while an unsecured personal loan generally does not. Instead of relying on collateral, lenders offering unsecured loans evaluate factors such as the borrower's creditworthiness, income, debts, and ability to repay.
Is a signature loan secured or unsecured?
A signature loan is generally an unsecured loan. It is based on the borrower's promise to repay rather than a specific asset pledged as collateral.
Does a personal loan require collateral?
Not always. Secured personal loans require collateral, while unsecured personal loans do not require a specific asset to secure the debt. The type of personal loan available to you depends on the lender and its qualification requirements.
Are secured personal loan rates lower than unsecured loan rates?
Secured loans may sometimes have lower interest rates because collateral can reduce risk for the lender. However, rates depend on the lender, borrower qualifications, loan amount, term, collateral, and other factors.
What can be used as collateral for a secured personal loan?
Acceptable collateral varies by lender and loan product. Depending on the financial institution, examples may include eligible savings, certificates, vehicles, or other qualifying assets. Ask the lender what types of collateral it accepts before applying.
Can a personal loan help build credit?
If a lender reports the account to the nationwide credit reporting companies, making your required payments on time can contribute to your credit history. The CFPB notes that on-time payments on credit products that are reported to the credit bureaus can help consumers establish or rebuild credit history. Late or missed payments, however, can negatively affect your credit.
Can I use a personal loan to consolidate debt?
Personal loans are commonly used for debt consolidation. Before consolidating, compare the new loan's APR, fees, repayment term, and total cost with the debts you plan to pay off to determine whether the new loan makes sense for your situation.
Find the Right Personal Loan in Oklahoma
There isn't one type of personal loan that works for every borrower. A secured personal loan may provide advantages when you have eligible collateral and are comfortable pledging it, while an unsecured personal loan or signature loan lets you borrow without attaching a specific asset to the debt.
If you're considering a personal loan in Oklahoma, Oklahoma Central Credit Union can help you explore your borrowing options. Compare available personal loan options, review current rates, and choose a repayment plan that works for your budget.
Explore Oklahoma Central Credit Union Personal Loans and check our current loan rates to get started.
