If you need to take a loan, you might doubt whether you should take a secured on an unsecured loan. Both options are open for borrowers with bad credit scores, so it is up to you to choose.

Secured loans are guaranteed with a form of collateral to ensure that you will pay them back according to the contract. However, this can mean that you can lose the collateral if you are unable to pay the loan. Unsecured loans aren’t backed up by collateral to give you peace of mind, but they come with higher interest rates.


Secured loans

A secured loan is backed up by collateral, such as investment, a vehicle, or a property. In a case of default, the lender will possess the collateral and regain the money. The financial institution will price your application and verify the assets, allowing you to borrow higher amounts of money.


Advantages of secured loans:

  • Lower interest rates. A collateral guarantees that you will fulfill your financial obligation towards the lender, making this transaction less risky.
  • Get approved for higher loan amounts. The collateral is a safe guarantee, so lenders won’t hesitate to support higher amounts of money.



  • Lengthy approval process. Since you include collateral, it will take some time for the lender to verify the assets and value.
  • Insurance is a must. The lender requires that you upkeep the asset’s value disclosed as collateral, meaning that you should pay for proper insurance. This guarantees that they will recoup the perceived value in case of a default.


Unsecured loans

An unsecured loan doesn’t require collateral so that the borrower won’t lose their assets in case of a default. This type of loan is secured with your creditworthiness, meaning that the lender will assess your credit history. When you have bad credit, the company will check other factors to understand your situation. They will consider different factors such as income and DTI ratio to assess your creditworthiness. However, there is a drawback when it comes to unsecured loans. For the lender, the only guarantee is your credibility and reliability. This means that they consider you as a risky borrower and will charge higher interest rates.


The advantages of unsecured loans include:

  • Fast approval process. You don’t need to undergo an extensive screening process, and the funds can be approved within one to three business days, depending on your lender.
  • You can’t lose your property or vehicle in case of default. When you haven’t disclosed any collateral, the lender doesn’t have the right to claim it. In a case of default, the lender will have to file a lawsuit to return the borrowed money.


The disadvantages of unsecured loans include:

  • Higher interest rate. Since the loan isn’t protected with collateral, the lender will charge more to make it up for the higher risk.


Which one is better if you have a bad credit score?

The difference between secured and unsecured loans is the guarantee. For secured loans, you will disclose an asset as collateral. Unsecured loans will use your reliability to guarantee that you will pay the loan at the total amount, relying on your financial history and debt to income ratio.


Borrowers with a bad credit score should pick according to their needs since there is no one-size-fits-all solution. While unsecured loans might be costly, they are a quick solution if you need small amounts of money fast.


They are commonly used for home renovations, medical bills, or car repairs. The approval process isn’t as long as with secured loans, so you can have the money transferred to your account within 24 hours upon getting approved. Some lenders can even process your application online and approve the funds, saving you so much time when you are in desperate need of cash.


However, have in mind that the loan amounts are limited when taking unsecured loans. Although this varies from lender to lender, you are more likely to get approved for lower amounts if you have a bad credit score.


Secured loans are a good choice if you want to consolidate debt or go for a larger home renovation project. In case you have accumulated debt, consolidation with a secured loan is a feasible option. Other debt with high-interest rates, such as credit card debt, can be consolidated into one debt with lower interest rates.

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