Quick comparison

  • Signature loan (unsecured): approval based on credit score, income and debt; no collateral required. Higher rates for higher lender risk. Useful for borrowers with strong credit who don’t want to pledge assets.
  • Secured personal loan: backed by collateral (savings account, vehicle, home equity, etc.). Lower rates, larger loan amounts, and more flexible eligibility, but the borrower risks asset seizure on default.

(For guidance on when to choose secured vs unsecured, see our page: When to Use a Secured Personal Loan vs Unsecured.)

How each loan type works

Signature loans are commonly called unsecured personal loans. Lenders evaluate credit score, credit history, debt-to-income (DTI), employment and income documentation. If you meet the lender’s risk threshold, the loan is approved with a fixed or variable interest rate and a fixed repayment schedule. Because the lender has no direct claim on your property, rates tend to be higher to compensate for risk (Consumer Financial Protection Bureau, n.d.).

Secured personal loans require collateral that the lender can claim if you default. Common collateral types include savings accounts (a “savings-secured” loan), vehicles, certificates of deposit, or home equity (either a closed-end home equity loan or a HELOC-style product). Collateral lowers the lender’s loss exposure, typically translating to lower interest rates, higher loan amounts, and looser credit score requirements.

Pros and cons: quick view

Signature (unsecured) loans

  • Pros: No asset at risk; faster funding from many online lenders; predictable monthly payments.
  • Cons: Higher interest rates for comparable borrowers; stricter credit requirements; smaller maximum loans for some lenders.

Secured personal loans

  • Pros: Lower rates and larger loan sizes; easier approval for borrowers with limited or damaged credit; may improve pricing if you have strong collateral.
  • Cons: Risk of losing collateral on default; longer approval if collateral must be verified or appraised; some lenders add administrative fees.

Real-world use cases

  • Debt consolidation with strong credit: A borrower with FICO 720+ can often secure an unsecured signature loan to consolidate high-interest credit card debt without pledging assets.
  • Home improvement for homeowners who prefer lower rates: Using home equity as collateral can reduce interest costs versus an unsecured loan, but increases the stakes because the home is on the line.
  • New credit history or thin file: A recent graduate with little credit history may qualify more readily for a secured product when they can offer a savings account or small vehicle as collateral.

In my practice I’ve guided clients to choose based on three priorities: cost (interest and fees), speed of access, and what they can risk losing. For example, one client with middling credit and a small cash cushion chose a savings-secured loan—lower rate, quick approval, and minimal collateral risk compared with pledging the house.

Cost, rates and how lenders price risk

Lenders price unsecured loans higher because there’s no asset to liquidate after default. Typical rate spreads vary widely across borrower profiles and lender types (banks, credit unions, online lenders, and peer-to-peer platforms). Secured loans often have narrower spreads because collateral reduces expected loss. Always compare the annual percentage rate (APR), not just the nominal rate, so you capture fees and finance charges (Consumer Financial Protection Bureau).

Avoid relying on published generic ranges. Instead, get prequalified quotes from multiple lenders and look at APR offers for your credit profile. If you’re comparing offers, also check origination fees, prepayment penalties, and late fees.

Eligibility and underwriting: what matters

  • Credit score and history: More influential for signature loans. Lenders may require scores in the mid-600s or higher for competitive unsecured pricing, but underwriting varies.
  • Income and DTI: Important for both loan types. Lenders want proof you can make payments.
  • Collateral valuation: For secured loans, lenders will verify the asset’s value and may require documentation (bank statements, vehicle title, or home appraisal).
  • Additional protections: Some secured loans have recourse clauses allowing lenders to pursue other borrower assets; others are non-recourse to the collateral only—read loan contracts closely.

For self-employed or gig workers, lenders often look at two years of tax returns or recent bank statements; see our guide on Unsecured Personal Loan Eligibility for Self-Employed Borrowers.

Risk management: what to watch for

  • Collateral risk: If you can’t afford to lose the asset you’re pledging (car, savings, or home), a secured loan may not be suitable.
  • Cosigner considerations: Both types may allow cosigners; with a cosigner the risk shifts to the cosigner’s credit and assets.
  • Default consequences: Unsecured loans can lead to collections and wage garnishment; secured loans can also result in repossession or foreclosure on the pledged asset.

Always ask: what remedies does the lender have on default? That answer determines the true downside.

When to choose each loan type

Choose a signature (unsecured) loan when:

  • You have good-to-excellent credit and can qualify for a competitive APR.
  • You cannot or do not want to put assets at risk.
  • You need quick access to funds and want a straightforward contract.

Choose a secured personal loan when:

  • Your credit is limited or damaged and you need better approval odds.
  • You need a larger loan amount or lower monthly payments than unsecured options allow.
  • You have a low-risk asset you’re comfortable pledging (e.g., funds in a CD or a vehicle you could replace).

For home projects where interest savings are meaningful, compare a secured loan or HELOC against personal loan offers and factor in closing costs, taxes, and the possibility of variable rates.

Application checklist and steps

  1. Check your credit report and score for errors (annualcreditreport.gov).
  2. Gather income documents: pay stubs, tax returns, bank statements.
  3. If applying for a secured loan, prepare collateral documentation: account statements, vehicle title, or property information.
  4. Get prequalification quotes from at least three lenders to compare APRs and fees.
  5. Read the loan contract: review default remedies, prepayment penalties, and whether the loan is recourse or non-recourse.
  6. Keep an emergency reserve to avoid re-pledging your collateral if payments become hard to make.

If you’re considering debt consolidation, our article Using Personal Loans to Consolidate Debt: What Lenders Want to See has a lender-focused checklist that helps maximize approval odds.

Common mistakes and misconceptions

  • Mistaking lower advertised rates for lower overall cost: always compare APR and fees.
  • Assuming secured always means “cheap”: if you risk losing your home or car, the economic and personal cost can outweigh rate savings.
  • Forgetting tax or insurance implications: using home equity may change tax deductibility and require homeowner’s insurance review—check current IRS and lender guidance.

Quick decision map

  • If protecting assets is top priority → unsecured/signature loan (if you have strong credit).
  • If getting the lowest monthly payment or approval with weak credit is key → secured loan (if you have acceptable collateral).

Sources and further reading

Professional disclaimer

This content is educational and general in nature and does not constitute individualized financial, legal, or tax advice. Terms, rates and underwriting standards vary by lender and change over time. For decisions about specific loan products, consult a qualified financial advisor or lender and review current disclosures before signing any agreement.