Introduction

Every loan you'll ever encounter falls into one of two categories: secured or unsecured. A secured loan is backed by collateral, an asset the lender can claim if you don't repay. An unsecured loan requires no collateral and is usually approved based on your credit profile.

This choice influences your interest rate, how much you can borrow, how easy approval will be, and the consequences if you can’t repay. Whether you're looking at personal loans, a mortgage, or newer options like crypto-backed lending, it’s important to understand secured vs. unsecured loans. This article will go through how each works, compare them directly, and help you choose the structure that makes the most sense for you.

What Is a Secured Loan?

A secured loan is a loan backed by collateral. The borrower pledges an asset of value, and the lender holds a legal claim (called a lien) on that asset until the loan is fully repaid. If the borrower defaults, the lender has the right to seize or liquidate the collateral to recover their losses.

Because collateral reduces the lender's risk, secured loans come with some notable advantages for borrowers: lower interest rates, higher borrowing limits, and more flexible qualification requirements.

Common Types of Secured Loans

Secured loans cover a wide range of products, from the most common loans most people take to newer alternatives.

Mortgages are the most familiar example. The home itself serves as collateral, and repayment terms typically run 15 to 30 years. If the borrower stops making payments, the lender can foreclose on the property.

Auto loans work similarly. The vehicle secures the loan, and the lender holds the title until the borrower pays it off.

Home equity loans and HELOCs let homeowners borrow against the equity they've built in their property. These are second-lien products, meaning the home serves as collateral for both the original mortgage and the equity loan.

Secured personal loans are backed by liquid assets like savings accounts or certificates of deposit (CDs). They're often used by borrowers who want lower rates or who are building credit from scratch.

Securities-based lending allows borrowers to take loans against investment or brokerage accounts without liquidating their portfolio.

Crypto-backed loans are a newer and growing category. Borrowers pledge crypto assets like Bitcoin as collateral and receive cash or stablecoins in return. The key appeal is accessing liquidity without selling the underlying asset. Platforms like Arch offer Bitcoin-backed loans designed for holders who want to borrow against their position while maintaining long-term exposure.

How Collateral and LTV Shape Your Loan Terms

One of the most important concepts in secured lending is the loan-to-value ratio, or LTV. This is the percentage of the collateral's appraised value that the lender is willing to lend. A lower LTV means less risk for the lender and, generally, better terms for the borrower.

LTV thresholds vary by asset class. Mortgages commonly allow up to 80% LTV (or higher with private mortgage insurance). Home equity products typically cap around 80 to 85% combined LTV. Crypto-backed loans tend to be around 40-60%, reflecting the higher price volatility of crypto. In practice, that means $20,000 worth of Bitcoin might secure a $10,000 loan.

For assets with volatile market prices, like crypto, lenders also use margin call and liquidation mechanisms to manage ongoing risk. If the value of the collateral drops and the LTV ratio rises above a set threshold, the lender may ask the borrower to deposit additional collateral. If the borrower doesn't act, the lender can liquidate part or all of the collateral to cover the outstanding balance. These mechanics are covered in more detail in the section on defaults below.

On the rate side, the advantage of secured lending is clear. The average unsecured personal loan rate at commercial banks sits around 11.65% APR as of late 2025 (according to Federal Reserve data), while secured options backed by high-quality collateral can start significantly lower.

What Is an Unsecured Loan?

An unsecured loan does not require collateral. Instead, the lender evaluates the borrower's credit score, income, employment history, and debt-to-income (DTI) ratio to decide whether to approve the loan and at what rate.

Because there is no asset backing the loan, the lender takes on more risk. If the borrower defaults, there's no specific property to seize. That added risk is reflected in higher interest rates, stricter qualification requirements, and lower borrowing limits compared to secured products.

Common Types of Unsecured Loans

Personal loans are the most common unsecured product. They're typically fixed-rate installment loans used for debt consolidation, large purchases, medical bills, or home improvements.

Credit cards are revolving unsecured credit lines. Most consumers interact with unsecured credit through their credit cards more than any other product.

Student loans, both federal and private, don't require collateral. Federal student loans in particular have fixed rates and income-driven repayment options that set them apart from most other unsecured products.

Medical financing and buy-now-pay-later plans are also unsecured. These products have grown significantly in recent years, offering short-term credit for healthcare costs or retail purchases.

How Creditworthiness Determines Your Terms

Without collateral, your credit profile does all the heavy lifting. Lenders look at your FICO score, how long you've had credit accounts, your payment history, your current debt load relative to income, and any recent credit inquiries.

Borrowers with excellent credit (scores of 720 or higher) can sometimes qualify for unsecured personal loan rates in the 7% to 14% range. Average rates across all credit tiers are higher, roughly 12% to 17% depending on lender type and loan term. Subprime borrowers with scores below 580 may face rates above 25%, and some online lenders charge up to 36% APR.

Loan amounts for unsecured personal loans typically range from $2,000 to $50,000, though some lenders will extend up to $100,000 for highly qualified applicants. That ceiling is lower than what most secured products can offer, since there's no asset underpinning the loan.

The bottom line: unsecured loans don't put specific assets at risk, but borrowing costs are meaningfully higher, and approval depends heavily on your credit standing.

Secured vs. Unsecured Loans

Secured loans are cheaper but carry asset risk. Unsecured loans are simpler but more expensive. Neither is inherently better. The right choice depends on what you have, what you need, and what level of risk you're comfortable with.

Secured vs Unsecured Loans: Pros and Cons

Secured Loan Advantages

Lower interest rates are the primary draw. Because the lender has a fallback if the borrower defaults, they're willing to offer more favorable pricing.

Borrowing limits are also higher with secured loans, since the loan amount is tied to the value of the collateral rather than just the borrower's income and credit history.

Qualification can be easier. Some secured products, particularly crypto-backed loans, don't require a traditional credit check at all. The collateral itself serves as the underwriting.

For holders of appreciating assets like Bitcoin, secured borrowing also carries a potential tax advantage. Borrowing against an asset is generally not a taxable event, unlike selling it.

Secured Loan Drawbacks

You need to own a qualifying asset to pledge. That's a barrier for borrowers who don't have significant savings, property, or investable assets.

There is real risk of losing your collateral. If you default on a mortgage, you lose the house. If your crypto collateral drops in value and triggers a liquidation, you lose some or all of your digital assets.

Setup can take longer than unsecured options, especially when appraisals, title checks, or compliance verification are involved.

For crypto-backed loans specifically, borrowers need to understand margin call and liquidation mechanics. These loans require more active monitoring than a standard installment loan.

Unsecured Loan Advantages

No collateral is needed, which means no asset is directly at risk if things go sideways. That's a meaningful form of protection for borrowers who want to keep their assets untouched.

Approval and funding are often faster, especially with online lenders, since there's no collateral to appraise or verify.

Unsecured loans are well suited for moderate, short-term needs: consolidating credit card debt, covering an unexpected expense, or financing a specific purchase.

Unsecured Loan Drawbacks

Interest rates are higher across the board to compensate for the lender's added risk.

Borrowing limits are smaller since lenders will cap how much they'll extend.

Qualification is stricter - you'll typically need a solid credit history, stable income, and a reasonable DTI ratio. Borrowers with thin or damaged credit may struggle to get approved, or may face rates that make the loan uneconomical.

And while no asset is seized on default, the consequences are still serious: credit damage, collection activity, and potential legal action including wage garnishment.

What Happens If You Can't Repay?

Understanding the default process for each loan type is important. The consequences differ in form, but both are significant.

Defaulting on a Secured Loan

For traditional secured loans like mortgages and auto loans, default triggers a repossession or foreclosure process. The lender seizes the collateral and sells it to recover the outstanding loan balance. If the sale doesn't fully cover what's owed, the borrower may still be responsible for the remaining amount, known as a deficiency balance. The timeline and legal process vary by state and loan type, but the credit impact is severe and can last seven years or more.

For crypto-backed loans, the process moves faster and is largely automated. If the value of the pledged crypto drops and the loan-to-value ratio climbs above the lender's threshold, the borrower typically receives a margin call, a notification to deposit additional collateral. If the borrower doesn't respond, the lender will liquidate enough of the collateral to bring the loan back within acceptable limits, or close the position entirely. Platforms like Arch provide a white glove service to help monitor LTV and prevent liquidations. Regardless, the speed at which crypto prices can move means this requires more attention than a traditional loan.

Defaulting on an Unsecured Loan

The typical progression on an unsecured loan default starts with missed payments and late fees. After about 180 days of nonpayment, the lender usually charges off the account and may sell the debt to a collection agency. From there, the borrower faces collection calls, credit score damage, and potentially legal action, which can include lawsuits and wage garnishment.

No specific asset is seized, but the financial and credit fallout can persist for years. A default on any loan, secured or unsecured, is something worth planning to avoid.

Who Uses Each Loan Type, and Why?

Secured Loan Borrowers

Homebuyers represent the largest group of secured borrowers. A mortgage is, by volume, the most common secured loan product.

Long-term Bitcoin holders are an increasingly common category. These borrowers want access to cash but don't want to sell their position and potentially trigger capital gains taxes. A crypto-backed loan from a platform like Arch lets them borrow against their holdings while staying invested.

Business owners frequently use secured lending to finance equipment, inventory, or real estate, using the purchased assets as collateral.

Borrowers with limited credit history also turn to secured products. A savings-secured or CD-secured loan can be a practical way to access credit and start building a payment history when unsecured options aren't available.

Unsecured Loan Borrowers

Consumers consolidating high-interest credit card debt are among the most common unsecured borrowers. Rolling multiple balances into a single fixed-rate personal loan can reduce both interest costs and complexity.

Individuals covering short-term expenses, such as medical bills, home repairs, or planned events, frequently use unsecured personal loans for their simplicity and speed.

Strong-credit borrowers who can qualify for competitive rates may prefer unsecured products because they don't want to tie up assets or deal with collateral requirements.

Students are another major category. Federal and private student loans are unsecured and represent one of the largest segments of consumer debt.

Crypto-Backed Loans

Crypto-backed lending has started to become mainstream. It follows the same fundamental logic as any secured loan, just with a different type of collateral. For borrowers who hold Bitcoin or other crypto assets, it represents a way to access liquidity at secured-loan rates without triggering a sale.

How Crypto-Backed Loans Work

Borrowers deposit crypto (usually Bitcoin) into a custodial account managed by the lender. The lender issues a cash or stablecoin loan based on the collateral's value, typically at a conservative LTV of around 50-60%. The crypto remains in custody for the duration of the loan and is returned to the borrower in full when the loan is repaid.

A few key distinctions set crypto-backed loans apart from traditional secured products:

No credit check is required in most cases. The collateral itself is the basis for approval, which makes these loans accessible to borrowers who might not qualify for traditional unsecured products.

Loans given out as fast as same day. Digital collateral can be verified and custodied quickly, often within hours rather than the days or weeks a mortgage or home equity loan might require.

Tax efficiency is a factor. Borrowing against an asset is generally not treated as a taxable event, while selling that same asset would be. For Bitcoin holders sitting on significant unrealized gains, this distinction can be meaningful. That said, if the collateral is liquidated due to a margin call, that event may create a taxable situation. Consult a tax professional for guidance specific to your circumstances.

Liquidation is automated. Unlike a mortgage foreclosure that unfolds over months, crypto collateral can be liquidated within hours if certain thresholds are breached. This means borrowers need to monitor their position actively, especially during periods of market volatility.

How to Decide Which Loan Type Is Right for You

Choose a Secured Loan If...

You hold valuable assets, whether that's real estate, savings, or cryptocurrency, and you want to minimize borrowing costs by pledging collateral.

You need a larger loan amount than what unsecured lenders typically offer.

Your credit history is limited or imperfect, but you have collateral that can offset the risk in the lender's eyes.

You want to access the value of an appreciating asset without selling it. This is the core use case for Bitcoin holders who borrow through a platform like Arch.

Choose an Unsecured Loan If...

You don't have assets to pledge as collateral, or you'd rather not put them at risk.

You need funds quickly and want a streamlined application with minimal documentation.

The loan amount is moderate, within the typical unsecured range of $2,000 to $50,000.

You have strong credit and can qualify for competitive rates without needing to secure the loan.

Frequently Asked Questions

What is the main difference between a secured and unsecured loan?

A secured loan requires collateral, an asset the lender can claim if you default. An unsecured loan requires no collateral and is approved based on your creditworthiness, income, and financial history.

Do secured and unsecured loans affect your credit score differently?

Both affect your credit in similar ways. Applying for either triggers a hard inquiry. Consistent on-time payments build your credit history. Missed payments damage your score regardless of loan type.

What credit score do you need for an unsecured personal loan?

Requirements vary by lender. Many set a minimum around 580 to 620, but borrowers with scores of 720 or higher are more likely to receive favorable terms. The most competitive rates typically go to borrowers above 720.

Are crypto-backed loans considered secured or unsecured?

Crypto-backed loans are secured loans. The borrower pledges cryptocurrency, most commonly Bitcoin, as collateral. If the borrower defaults or the collateral's value drops below the lender's LTV threshold, the lender can liquidate the crypto to recover the loan balance.

Can I get a loan without a credit check?

Yes. Many secured loan products, particularly crypto-backed loans, don't require traditional credit checks. Approval is based on the value of the pledged collateral rather than the borrower's credit score. Arch offers Bitcoin-backed loans that follow this model.

Can you convert an unsecured loan to a secured loan?

Not directly. They are distinct products with separate underwriting. However, some borrowers refinance unsecured debt into a secured product, such as a home equity loan or crypto-backed loan, to access a lower interest rate.

What types of assets can be used as collateral for a secured loan?

Common collateral includes real estate, vehicles, savings accounts, certificates of deposit, investment portfolios, business equipment, and digital assets like Bitcoin and Ethereum. Accepted collateral types vary by lender.

Conclusion

The choice between secured and unsecured borrowing comes down to three things: what assets you hold, what you're willing to pledge, and how much you want to pay in interest. Neither loan type is universally better. Each serves a different financial profile and a different set of goals.

Always compare specific offers from multiple lenders, read the full terms carefully, and make sure the loan structure aligns with your financial situation.

About Arch

Arch is building a next-gen wealth management platform for individuals holding alternative assets. Our flagship product is the crypto-backed loan, which allows you to securely and affordably borrow against your crypto. We also offer access to bank-grade custody, trading and staking services.

Disclaimer: This article is for informational purposes only and does not constitute investment or tax advice. Cryptocurrency investments are volatile and risky. Always conduct your own research before making investment decisions.