Secured vs. Unsecured Loans | CIBC (2024)

FAQs

Secured vs. Unsecured Loans | CIBC? ›

Secured loans and lines of credit are secured against your assets, resulting in higher borrowing amount and lower interest rates. Unsecured loans allow for faster approvals since collateral is not required.

Since secured loans will often have lower interest rates and higher borrowing limits, they may be the best option if you're confident about being able to make timely payments. That said, an unsecured loan may be the best choice if you don't want to place your assets at risk.

Credit cards, student loans, or personal loans are considered unsecured loans. Lenders take a larger risk by offering this type of loan to an individual since there is no asset to seize if a borrower defaults. For this reason, interest rates will be higher and payment plans may be stricter.

Secured loans explained

Secured loans are less risky for lenders because they can take your asset if you can't make the repayments. Lenders will often lend more and over a longer term than unsecured loans, typically at a lower interest rate.

Key Takeaways

A secured line of credit is guaranteed by collateral, such as a home. An unsecured line of credit is not guaranteed by any asset; one example is a credit card. Unsecured credit always comes with higher interest rates because it is riskier for lenders.

Eventually, a secured loan agreement can boost your credit score – especially if you use the funds to consolidate unsecured debts into manageable monthly payments. You will reduce the number of open credit agreements against your name and utilise considerably less unsecured credit.

They're generally easier to qualify for, which is especially valuable if you have bad credit. Paying them back on time can also help you build your credit score. But secured loans also carry hefty penalties if you don't repay your loan. Remember, secured loans are backed by your home, car or other valuable assets.

If you're certain that you can repay the debt as agreed, a secured loan could be an inexpensive borrowing option. And if you have bad credit, it may be your only choice. But an unsecured loan can be a safer choice if you have good credit scores and don't want to risk losing your assets.

To qualify for a personal loan, borrowers generally need a minimum credit score of at least 580 — though certain lenders have even lower requirements than that. However, your chances of getting a low interest personal loan rate are much higher if you have a “very good” or “excellent” credit score of 740 and above.

Pros of unsecured loans

No collateral required. Fast access to funds. No risk of losing assets. Fewer borrowing restrictions.

What is a disadvantage of a secured loan? ›

Disadvantages of Secured Loans

The personal property named as security on the loan is at risk. If you encounter financial difficulties and cannot repay the loan, the lender could seize the property. Typically, the amount borrowed can only be used to purchase a specific asset, like a home or a car.

Almost all lenders of secured loans will apply an early exit penalty fee to closing a balance before the end of the agreed term. In an ideal world, you would repay the balance remaining on a secured loan and close an account without further expenses.

You may be refused for a secured loan if the item as collateral is considered not valuable enough. This is important, as the collateral possession will be the item that is used to retrieve money back if you are unable to pay.

Fortunately, your home is safe from any creditors who do not have a mortgage or lien on it. Credit card companies and other unsecured loan holders can't come and simply take your property or home after missing a few payments. A creditor will first start making collection attempts by mail, phone calls or other methods.

While secured credit cards are a popular option for building or rebuilding credit, they aren't necessarily better or worse for your credit than unsecured cards. In fact, the type of card, the card's fees, the interest rate and whether it's secured don't have any impact on your credit scores.

Defaulting on an unsecured loan

Then, once your account goes to collections, the collections agency has the right to sue you for the money you owe. If necessary, they can also get a court order to garnish your wages or put a lien on any assets you own, such as your home.

Unsecured credit cards tend to come with better perks and rewards, lower fees and lower interest rates. Secured credit cards are usually for people with poor credit or no credit history, whereas unsecured credit cards are usually for people with good credit or better.

Whether debt is secured or unsecured, having a plan to pay it off can be helpful. It's important to make at least the minimum payment on all debts as part of any plan. But it could make sense to put more money toward secured debt to ensure you don't lose collateral—especially if that collateral is a home or a car.