The short answer. A secured loan is backed by something you own, such as a car, a house, or a savings balance. If you stop paying, the lender can take that asset. An unsecured loan is backed only by your promise to repay and your credit history. Nothing specific is pledged, so if you default the lender’s options are collections, credit damage, and possibly a lawsuit. The lender carries more risk on an unsecured loan, and you pay for that in the rate. Federal Reserve figures put the gap at roughly 4.7 percentage points.
The definitions are the easy part. What matters when you have two offers in front of you is how big the price difference really is, and what you are putting up as security to get it.
What the rate gap actually is
The Federal Reserve publishes average interest rates for consumer credit in its G.19 release. It surveys the same commercial banks for both secured and unsecured products, so you can read the spread straight off one table instead of comparing one lender’s advertised rate against another’s.
| Credit type | Backed by | Average rate |
|---|---|---|
| New car loan, 72 months | The vehicle | 6.97% |
| New car loan, 60 months | The vehicle | 7.14% |
| Personal loan, 24 months | Nothing, unsecured | 11.86% |
| Credit card, accounts assessed interest | Nothing, unsecured revolving | 22.15% |
The gap between a secured car loan and an unsecured personal loan is close to five points. On a $20,000 balance over five years that is real money rather than a rounding difference. The jump to unsecured revolving credit is much larger again. If you are carrying a card balance above 22%, the question usually is not secured versus unsecured at all. It is whether moving that balance into any fixed-rate installment loan beats what you are paying now.
What counts as collateral
Collateral is a specific asset named in the loan agreement, against which the lender holds a legal claim, called a lien, until the debt is cleared. The common types:
- A vehicle, on an auto loan or a title loan. The lender holds a lien on the title and can repossess the car, in many states without going to court first.
- Your home, on a mortgage, home equity loan, or HELOC. Default leads to foreclosure, which is slower than repossession because it goes through the courts, and far more consequential.
- Cash you already have, on a share-secured loan or a secured credit card, where a savings balance or deposit is frozen as security. These exist mainly to build credit rather than to fund a purchase.
- Business assets such as equipment, receivables, or inventory on a commercial loan, often alongside a personal guarantee from the owner.
Unsecured borrowing covers most personal loans, nearly all credit cards, federal student loans, and medical debt. No specific asset is pledged. That does not mean there is no consequence, only that the consequence is slower and less direct.
The part that trips people up. Unsecured does not mean the lender has no recourse. A defaulted unsecured debt can go to collections, be sold on, and in many states end in a judgment, wage garnishment, or a bank levy. The difference is that the lender has to get a court order first. On a secured loan they already hold the claim.
When a secured loan is the right call
Secured borrowing makes sense when the collateral is the thing you are buying, or when you genuinely cannot get affordable credit any other way.
You are financing the asset itself
A car loan or a mortgage is secured by definition, and the low rate reflects the fact that the lender can recover most of its money by taking back what you bought. There is no real decision here. An unsecured loan to buy a car would cost you several points more for no benefit.
Your credit is limited and you are rebuilding
A share-secured loan or a secured credit card, backed by your own deposit, is one of the few ways to build payment history when no unsecured lender will approve you. You are not really borrowing so much as paying a little interest to create a credit record. If that is your situation, read our guide to improving your credit before taking on larger debt.
The rate difference is large enough to justify the risk
If securing the loan saves you five points, the arithmetic favors it. That only holds if you are confident you can keep up the payments through a bad month.
When unsecured is worth paying more for
The higher rate on an unsecured loan is not a penalty. It is the price of keeping your assets out of the agreement, and there are situations where that price is clearly worth paying.
- Your income is variable. On commission, contract, or seasonal earnings, a bad quarter can cause a missed payment, and putting your car or home behind the loan turns a cash flow problem into losing an asset.
- The money is not buying an asset. Consolidating debt, covering a medical bill, funding a move. There is nothing to repossess anyway, so securing the loan against something unrelated adds risk without adding logic.
- You need the money quickly. Unsecured loans skip appraisal, title work, and lien filing, so funding in one to three business days is normal. A home equity loan usually takes weeks.
- The asset is the roof over your head. Rolling unsecured debt into a home equity loan lowers the rate, but it converts debt you could survive defaulting on into debt that could cost you the house.
What actually sets your rate
Secured or unsecured is one input, not the whole calculation. Within either category, the spread between the best and worst offers a borrower is shown tends to be wider than the spread between the categories. Credit score is the biggest single factor, and our personal loans guide breaks down typical APR ranges by credit tier.
Lenders also weigh your debt-to-income ratio, and most unsecured lenders want total monthly debt payments under roughly 40% of gross income. Secured lenders can tolerate more, because the collateral absorbs their risk. Longer terms usually carry higher rates and always cost more in total interest, even when the monthly payment looks friendlier. Very small loans often price higher, because the lender spreads a fixed origination cost over less principal. On secured loans, borrowing 95% of a car’s value prices worse than borrowing 60%, since the lender’s cushion is thinner.
How to compare two offers properly
Comparing a secured offer against an unsecured one on the headline rate will mislead you. Adjust for these:
- Compare APR, not interest rate. APR includes origination fees, which commonly run 1% to 10% on unsecured personal loans and are often deducted from what you actually receive. A 9% rate with a 6% origination fee is not a 9% loan.
- Compare total cost over the same term. A secured loan at 7% over seven years can cost more in total interest than an unsecured loan at 11% over three, even though the monthly payment is lower. Run both through a loan calculator before you decide.
- Price the risk you are taking on. No offer sheet puts a number on this, so it tends to get skipped. Ask what happens if you miss three payments. On an unsecured loan the answer is serious credit damage. On a loan secured by your car, the answer may be that you also lose the way you get to work.
Checking prequalified rates across several lenders uses a soft credit inquiry and does not affect your score, so seeing both types side by side before you commit costs you nothing.
Frequently asked questions
Is a personal loan secured or unsecured?
Most personal loans are unsecured. Some lenders offer secured personal loans backed by a savings account, a certificate of deposit, or a vehicle, and these are usually aimed at borrowers who cannot qualify unsecured. The loan agreement states plainly whether collateral is pledged. If no asset is named, the loan is unsecured.
How much cheaper is a secured loan?
On the most recent Federal Reserve G.19 figures, the average 60-month new car loan at a commercial bank runs 7.14% against 11.86% for a 24-month unsecured personal loan, a gap of about 4.7 percentage points. Your own gap will differ, because credit score, term, and loan-to-value all move the number.
What happens to my collateral if I default?
The lender can take it. For vehicles that means repossession, which in many states can happen without a court order once you are in default. For property it means foreclosure, which goes through the courts. If the asset sells for less than the outstanding balance you may still owe the difference, called a deficiency balance, depending on your state’s law.
Can I get an unsecured loan with bad credit?
Sometimes, though the rate will be high and the amount limited. Below roughly 580, many unsecured lenders decline outright. A secured option or a co-signer usually widens what is available. Our bad credit loans guide covers what to expect at different score bands.
Does applying for either type hurt my credit score?
Checking prequalified rates uses a soft inquiry, which does not affect your score. Submitting a full application triggers a hard inquiry, which typically costs a few points and stays on your report for two years. This works the same way for secured and unsecured loans.
Should I use a home equity loan to consolidate credit card debt?
It will almost certainly lower your rate, since credit cards average above 22% while home equity rates are far lower. But it converts debt that cannot cost you your home into debt that can. If your income is stable and you have a fixed schedule to clear the balance, the math works. If the card balance came from a cash flow problem you have not solved, you have moved the risk somewhere much worse.
How we produced this. Rate figures come directly from the Federal Reserve Board’s G.19 Consumer Credit statistical release, Terms of Credit at Commercial Banks table, release dated 8 September 2026. We update them when the Board publishes new quarterly data. Last reviewed 14 September 2026.
About Loans.net. We are a marketplace, not a lender. We receive compensation from a lender only if you complete the process and a loan is disbursed, and that compensation does not change how or where lenders appear in your results. We never charge you a fee. This article is general information, not financial advice. Prequalified rates are not a firm offer of credit. All loans are subject to underwriting and approval. Not available in all states.