DayCents

Secured vs. Unsecured Loan

A secured loan is backed by collateral — a house for a mortgage, a car for an auto loan — that the lender can seize if you don't pay. An unsecured loan (most personal loans and credit cards) has no collateral, so it carries a higher rate to offset the lender's added risk.

Collateral is why mortgage and auto rates are far below credit-card rates. The trade-off: defaulting on a secured loan can cost you the asset, while unsecured default damages your credit and may lead to collections, but not repossession of a specific item.