What Is the Difference Between a Secured Loan and an Unsecured Loan?


Quick Answer

Tesco Bank states that the primary difference between a secured loan and an unsecured loan is that a secured loan is backed by collateral while an unsecured loan is not. Secured loans provide a greater level of protection to the lender, since the collateral becomes the property of the lender if the borrower defaults.

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What Is the Difference Between a Secured Loan and an Unsecured Loan?
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Full Answer

According to Tesco Bank, the additional protection offered by a secured loan is frequently reflected by higher borrowing limits and lower interest rates. Although unsecured loans are not backed by collateral, lenders do not blindly loan money. A person's credit score, employment history and income play a role in determining at what rate and how much money that person is permitted to borrow.

WiseBread lists auto loans, mortgages and home equity lines of credit as secured loans. If the borrower defaults on these types of loans, the lender can legally seize the property used as collateral. Examples include repossessing a car or foreclosing on a house. The most common types of unsecured loans are personal lines of credit, student loans and credit cards. Since there is no collateral with unsecured loans, lenders must use a different set of techniques to collect on defaulted debts.

Financial Web reports that negative marks on a person's credit report are the first consequence of default. A creditor may pursue collection through mail or phone calls or via a court judgement that allows it to freeze bank accounts or garnish wages.

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