Secured vs. Unsecured Bad Credit Personal Loans

What is the difference between a secured and unsecured bad credit personal loan?

If you are shopping around for a personal loan and you have poor, bad, or very bad credit, you will undoubtably come across both secured and unsecured bad credit personal loans. Depending on your situation, either borrowing option might be right choice for you. On this page, we hope to help you understand the fundamental differences between these two popular loan options so you can make the best possible financing decision.

Secured Bad Credit Personal Loans

If you are looking to borrow a large sum of money, then a secured bad credit personal loan is the way you will likely have to go. With secured loans, the borrower is expected to provide collateral in the form of a home, car, or other valueable asset. If you are unable to repay the loan, the lender has the right to take control of whatever collateral you put up for the loan. They can then sell it or take other recourse to recover their money. 

Two examples of secured bad credit personal loans that you might be familiar with are home equity loans and automobile loans. With home equity loans, the lender actually gets the rights to your home in exchange for a mortgage. With auto loans, the car or truck acts as the collateral. 

In general, secured bad credit personal loans offer longer repayment plans (up to 30 years or so for home loans) and lower rates than unsecured loans.

Unsecured Bad Credit Personal Loans

Unsecured personal loans are usually offered by private loan lenders and do not require any form of collateral to obtain. With these loans, lenders do not have the ability of taking control of your collateral in the case of default. Instead, unsecured loans are usually granted only when the lender believes you can pay based on your current financial resources.

The rates for unsecured personal loans are generally higher than secured loans, but this can actually work in the favor of people struggling with bad or very bad credit. With unsecured bad credit personal loans, lenders have the ability to make use of tiered interest rates to make loans more accessible to people with poor credit. The biggest disadvantage to this is that you're likely to pay a much higher interest rate, but this is reality with almost every bad credit loan.