OnPath Credit Union

The primary difference between a secured loan and an unsecured loan is that the secured loan requires collateral. Unsecured loans do not require collateral. There are other common differences between the two loan types, but they typically extend from that key difference.

Many people have both secured and unsecured loans without recognizing the difference. From a borrower’s perspective, they operate in essentially the same way. 

Examples of Secured Loans

The two most common types of secured loans are auto loans and home loans. Both types of loans are secured by the property they finance. In the case of a mortgage, the loan is secured by the home. In the case of an auto loan, the financing is secured by the vehicle the borrower purchased.

If the borrower were to default on their loan, the collateral could be repossessed. The ultimate point of repossession is to minimize losses for the lender.

Examples of Unsecured Loans

The most common type of unsecured loan, by far, is credit cards. Other common examples many Americans carry are student loans, medical debt and different types of personal loans. The consequences for defaulting on unsecured debt do not include losing any specific property.

Despite less perceived risk with unsecured debt, there are still serious consequences for not repaying these loans or lines of credit. Failing to make payments on time will result in damage to your credit score, make qualifying for all types of loans in the future more difficult (including secured loans) and may result in the borrower being subjected to legal actions and aggressive collections efforts.

Are There Differences in Interest Rates Between the Two Loan Types?

Potentially yes, but it depends on the type of loan and the borrower. The basic idea is that unsecured loans are riskier for lenders since there’s no collateral to backstop their losses if a borrower decides not to pay or simply can’t pay due to financial challenges. As a result, unsecured loans often have higher interest rates.

You can see a clear example of this difference by examining the average APR for credit cards versus the average APR for mortgages for U.S. borrowers as of May 2024:

• Average APR for new credit cards: 24.71 percent
• Average APR for 15-year fixed mortgages: 6.83 percent

What Happens If I Default on My Secured or Unsecured Loan?

Secured Loan Consequences

Your loan agreement will likely stipulate the process by which collateral will be seized, including the steps and how long you can miss payments before these consequences occur.

Many lenders provide a grace period, often 10 to 30 days, in which you can make up missed payments without severe penalties. If you continue to miss payments, they’ll begin the pre-foreclosure or repossession process.

The formal pre-foreclosure or repossession process often starts after 90 days, or three months, of missed payments, but it depends on the loan contract. If a borrower communicates with the lender and establishes a payment plan or modifies their loan, they may be able to avoid this process.

In most situations, a lender is required to provide formal notice prior to seizing collateral. This last notice is intended to give borrowers one last chance to settle their outstanding debt or negotiate a workable repayment arrangement. Lenders are often willing to compromise because they would rather be repaid than repossess property.

For a high-value or important asset, like a home, court proceedings could be involved with the formal foreclosure process. Drawn-out court proceedings can potentially delay the formal foreclosure process and buy the borrower more time, but their interest will continue to accrue in the meantime.

There’s no federally mandated grace period or length of foreclosure time, which is why it’s important to read your loan agreement and understand the process, your duties and your rights prior to signing.

Unsecured Loans

The consequences of defaulting should be outlined in any unsecured loan agreements. The grace periods are typically shorter – often only 10 to 15 days – before additional penalties and fees are incurred. Collection efforts may be started soon after, with non-payment being reported to credit bureaus within 30 days of missed payments.

It’s not uncommon for lenders to “charge-off” unpaid debt after 180 days. This means they sell the debt to a third-party collection agency who will continue pursuing aggressive collection efforts against the borrower.

Although there’s no official collateral for unsecured debt, lenders may eventually take legal action that can result in aggressive measures to recover assets. In addition to wage garnishment, this can lead to liens on some of your property and the seizure of bank accounts.

Get Access to Competitive Rates on Secured and Unsecured Loans in New Orleans and Nationwide

One of the many perks of OnPath Federal Credit Union membership is access to a diverse array of both secured and unsecured loan products. From auto loans and mortgages to personal loans and credit cards, we offer a comprehensive suite of borrowing services for all types of banking customers.

Call us at 800.749.6193 to learn more about becoming an OnPath FCU member.