Secured and Unsecured Loans


One way that loans differ is that some are secured and others are unsecured.

With a secured loan, you must provide collateral, which the lender can take from you if you default, or fail to repay on schedule. For example, if you take a car loan, the car is the collateral. If you don't pay, the lender can take the car.

With an unsecured loan, the only guarantee the lender has is your promise to repay. Some unsecured loans have higher rates than secured loans to protect the lender against the risk you'll default. There's one important exception, though. Federal student loans are unsecured but the interest rates are lower than on many other types of loans.

FAILING TO REPAY

The penalty if you default on a secured or unsecured loan, especially a student loan, has serious consequences that affect your future. This information is provided in the master promissory note (MPN) you sign when you take the loan.

  • Not repaying a loan can make it difficult, or even impossible, to borrow again, which may mean you can't finish your education
  • You won't qualify for deferment or forbearance
  • You could be sued
  • A lender can go to court to garnish your wages and collect a portion of your salary each time you're paid

Learn more about the consequences of not repaying a student loan.