At Cunningham Dalman, a common question we hear from clients—whether they’re business owners, individuals lending money to a friend, or people applying for financing—is:
“What’s the difference between a secured loan and an unsecured loan?”
It’s an important question, and understanding the difference can make a big impact on how protected you are if something goes wrong.
Secured Loans: Backed by Collateral
A secured loan is backed by something of value—called collateral. If the borrower doesn’t repay, the lender has the legal right to take that collateral to help recover what they’re owed.
Common examples of secured loans include:
- Mortgages (the house is the collateral)
- Car loans (the car is the collateral)
- Business loans secured by equipment, inventory, or receivables
Why it matters: Because there’s less risk for the lender, secured loans often come with lower interest rates and better terms. However, if the borrower defaults, the lender can repossess or foreclose on the collateral—often without needing a court order.
Unsecured Loans: Based on Trust (and Credit)
An unsecured loan doesn’t involve any collateral. Instead, the lender relies on the borrower’s creditworthiness and promise to repay. If repayment doesn’t occur, the lender cannot immediately take property—they must first go through the legal process.
Common examples of unsecured loans include:
- Credit cards
- Personal loans
- Some business lines of credit
Why it matters: Because the lender is taking on more risk, unsecured loans usually carry higher interest rates. If the borrower stops paying, the lender must take legal action—such as filing a lawsuit—before collecting through wage garnishment or liens.
How This Plays Out in Real Life. Imagine lending money to a friend or customer.
If the loan is secured with a promissory note and a security agreement—using an asset such as a vehicle or equipment as collateral—you may have the right to repossess the asset if repayment stops.
If the loan is unsecured, and the borrower doesn’t pay, you’ll likely need to go to court, obtain a judgment, and then attempt collection through other means.
In short, having collateral provides more leverage and protection if the borrower defaults.
Final Thoughts
If you’re borrowing money, offering collateral may help you qualify for better terms—but it also means risking that asset if repayment becomes difficult.
If you’re lending money, securing the loan can protect your interests. Instead of being an unsecured creditor (often last in line), you become a secured creditor—typically first to be paid if something goes wrong.
At Cunningham Dalman, we help clients create clear, enforceable agreements that protect their rights and minimize financial risk.
When it comes to lending or borrowing, start with the right legal foundation.
Contact us today to discuss your specific situation. We’ll help you document your loan properly and explain your options—so you can move forward with confidence.
