Loans fall into two broad categories — secured and unsecured. The difference is whether the loan is backed by collateral, and it affects almost everything about the loan.
Secured loans are backed by an asset:
- The loan is tied to collateral — something of value the lender can claim if you do not repay.
- Common examples: a mortgage (secured by the home) and an auto loan (secured by the vehicle).
- Because the lender takes on less risk, secured loans usually have lower interest rates and can allow larger amounts.
- The risk to you: defaulting can mean losing the asset — foreclosure or repossession.
Unsecured loans are not backed by collateral:
- Approval is based mainly on your creditworthiness — your credit score, income, and history.
- Common examples: most personal loans, credit cards, and student loans.
- Because the lender has no specific asset to claim, rates are typically higher than for comparable secured loans.
- Default does not cost you a specific asset, but it leads to collections and serious credit damage.
Which is right for you? It often depends on the purpose. Buying a home or car naturally uses a secured loan; consolidating debt or covering an expense without collateral often uses an unsecured personal loan. See RMO personal loan options.