Most personal loans are unsecured, meaning no collateral backs the loan — the lender's decision rests entirely on your credit profile and income. A smaller share of personal loans are secured, requiring you to pledge an asset like a savings account or vehicle title, which changes both the approval odds and the risk involved.
Why most personal loans skip collateral entirely
Unsecured personal loans are underwritten purely on creditworthiness. Lenders accept the higher risk of having no asset to claim if you default, and price that risk into the interest rate. For borrowers with solid credit, this tradeoff works fine — the simplicity of no collateral outweighs any rate difference a secured option might offer.
Defaulting on an unsecured personal loan doesn't put a specific asset at risk the way a secured loan does, but it still damages your credit significantly and can lead to collections or legal action to recover the debt.
When a secured personal loan becomes the better option
If your credit profile doesn't qualify for a favorable unsecured rate, a secured personal loan backed by, for instance, funds in a savings account can sometimes unlock a meaningfully lower rate, since the collateral reduces the lender's risk. This works well for someone who has assets but a thin or damaged credit history.
The real risk secured loans introduce
The tradeoff is straightforward: if you default on a secured loan, the lender can claim the pledged asset. This is a materially different risk profile than an unsecured loan, where default leads to credit damage and collections but not direct loss of a specific asset. Anyone considering a secured personal loan should weigh this risk carefully against the rate savings.
- Check whether your credit profile already qualifies for a competitive unsecured rate before considering a secured option
- If considering a secured loan, understand exactly what asset is being pledged and the conditions under which it could be claimed
- Compare the rate difference between secured and unsecured offers to see if the risk is actually worth the savings
- Confirm whether the secured loan reports to credit bureaus the same way an unsecured loan would
Frequently asked questions
Are secured personal loans common?
They're less common than unsecured personal loans, but available through some banks and credit unions, often called savings-secured or share-secured loans when backed by a deposit account.
Can I get a lower rate by adding a co-signer instead of collateral?
Yes, a co-signer is a different way to reduce a lender's risk without pledging an asset, though it carries its own risk to the co-signer's credit if payments are missed.