The difference between an unsecured and secured loan is that an unsecured loan does not have any collateral backing the loan and a secured loan does. If you take out a secured loan you will be required to offer collateral that has the same or similar value to the amount you are borrowing. If you do not repay the loan, the lender has the legal right to sell the collateral to recover on the loan. A home loan is an example of a secured loan. The house is the collateral for the home loan. A mortgage contract involves placing a lien on the property. The mortgage lender has priority on the loan and has the legal right to foreclose on the property and sell it either at auction or through its REO department in order to recover on the loan.
A car loan is another example of a secured loan. The car is the collateral for the loan. If the borrower does not make his or her car payments the lender has the legal right to repossess the car and sell it. Secured loans generally have lower interest rates than unsecured loans due to the fact that there is collateral backing the loan. The drawback to a secured loan is that you could potentially lose the collateral if you are unable to repay the loan.
Unsecured loans do not have any collateral acting as security on the loan. The agreement is based on your promise to repay the loan to the borrower. Unsecured loans are higher risk and come with much higher interest rates than secured loans. One example of an unsecured loan is a credit card. You do not have to put up any collateral in order to get a credit card, but you do need to go through an approval process where you income is verified and your credit history is checked. The interest rate you pay will largely determined by your credit rating as well as your repayment history on previous loans.
Most major purchases such as a home or car usually require a secured loan. You have use of the car and home as long as you make your payments on time. Once you have the loan paid off the lien on the home or car is lifted and you own them outright. If you fail to makes your payments and default on your loan, the lender has the right to take back the home or car and sell it in order to recover on the loan.