Secured vs. Unsecured Line of Credit: What's the Difference?

A personal Line of Credit gives you access to funds without repeating the loan application process every time you need to borrow money. You can borrow as much or as little money as you'd like up to your credit limit. This flexibility is great as it allows you to match your fluctuating expenses and needs.

For example, let's say you're going to start a home renovation project. You know you'll need ongoing access to money, but you're not sure how much – or how often – you'll need to pay for different parts of the project. Rather than taking out multiple small loans, you can open a single Line of Credit that allows you to tap into funds as you need them.

Lines of Credit can be either secured or unsecured. Here's how to decide which type of Line of Credit is right for your financial situation.

What is a secured Line of Credit?

A secured Line of Credit is a type of revolving loan backed by collateral. Collateral is something valuable you offer a lender in exchange for a loan. Common types of collateral include your car title or the deed to your house. 

To open a secured Line of Credit, you'll need to work with a lender that accepts a form of collateral that you own free and clear. 

Secured Lines of Credit can be easier to qualify for because they're less risky to the lender.

If you can't repay the money you borrow, the lender keeps the collateral to recoup the costs. Only when you repay a secured loan in full, plus interest, do you get the collateral item back.

What is an unsecured Line of Credit?

If you don't like the risks associated with secured loans, you can also opt for an unsecured Line of Credit.

An unsecured Line of Credit still offers easy access to ongoing funds, but you don’t need to provide an asset, like your car or house, as collateral. Instead, the amount of your credit line is largely based on your income, employment status, and current debts.

>RELATED: How To Use a Line of Credit To Pay Off Debt

Types of secured credit lines

There are different types of secured Lines of Credit you can consider based on the collateral you have to offer. These include:

Home equity line of credit. With a home equity line of credit (HELOC), you're borrowing money based on the value of your home. Your credit limit is calculated as the appraised value of your home minus the amount you owe on your mortgage.

In order to open the credit line, you'll offer your house as collateral, which means you risk losing it if you can't repay what you borrowed.

Business line of credit. If you need revolving credit for business purposes rather than personal ones, you can apply for a business line of credit. Similar to a home equity line of credit, your business serves as the loan collateral.

Car title line of credit. If you don't own a home or business but you do have a paid-off vehicle, you may be able to apply for a credit line using your car as collateral. With these types of secured personal loans, you can keep driving your car despite handing over your title to the lender. 

However, your lender will keep the title and repossess the vehicle if you can't repay what you borrow.

Alternative secured lines of credit. In addition to using your car, home, or business as collateral, you might find a lender that accepts other valuable assets in exchange for a secured line of credit. These assets might include rare collectibles, RVs, boats, and jewelry, among other things.

Advantages of a secured Line of Credit

While a secured Line of Credit isn't for everyone, this type of loan can offer several advantages.

• May secure a lower interest rate since the lender isn't taking on much risk.
• Don't necessarily need a good credit history.
• Can use your Line of Credit for anything you need.

Disadvantages of a secured Line of Credit

As with any type of personal loan, a secured credit line also has drawbacks.

• Risk losing whatever you offer as collateral.
• May lose your home, business, or means of transportation.
• May face higher fees compared to other types of personal loans.

Advantages of an unsecured Line of Credit

Unsecured lines of credit have several advantages.

• Less risk to the borrower because you don't have to offer anything valuable as collateral.
• Easy access to money when you need it most.
• Quick funding, with most lenders depositing money directly to your checking account upon approval.

While most traditional lenders won't offer unsecured loans to someone with bad credit, Advance America works with borrowers from all credit backgrounds. As long as you live in a state where we offer unsecured Lines of Credit, we can use your proof of income and employment status to make an approval decision.

Secured vs. unsecured Line of Credit: Which one is right for you?

If you have bad credit and can't qualify for an unsecured credit line, secured financing may be your only option. Unfortunately, secured loans come with more risk to the borrower because you could lose a valuable asset. An unsecured Line of Credit may be a better option due to there being no risk of losing collateral.

However, there are other factors to consider, such as origination fees and interest rates. These factors will vary by lender and borrower qualifications. The best option for you will be the option that best fits your financial situation.

Apply for a line of credit today

4 alternatives to a personal Line of Credit

If you're not sold on opening a Line of Credit of either type, you might consider one of these options:

Home equity loan. Similar to a HELOC, a home equity loan is based on the value of your home. Home equity loans typically offer competitive interest rates, usually close to the rate of your initial mortgage.

Secured credit card. A secured credit card requires you to pay a cash deposit when you open the account. You then use the card just like you would a traditional credit card, but if you're unable to make your monthly payments, the lender keeps your deposit.

Payday Loan. If you want a quick, small-dollar unsecured loan that's easy to apply for, consider a Payday Loan. This type of personal loan is designed to be repaid on your next payday, doesn't require a credit check, and is available online or in-store — often with same-day funding.

Installment Loan. If you like the ease and convenience of a Payday Loan but need a larger amount of money, consider an Installment Loan. With an alternative lender like Advance America, you don't necessarily need a good credit score to qualify for the amount you need.