Secured vs. Unsecured loans: How they work and how to choose in 2026

In 2026, borrowers have more lending options than ever before, from traditional bank loans to decentralised finance (DeFi) protocols. But one distinction still shapes how most loans work: whether the loan is secured by collateral or unsecured.

This guide explains the difference, the trade offs to understand, and how secured and unsecured models show up in both traditional finance and crypto lending.

What is a secured loan?

A secured loan is backed by collateral, an asset the lender may claim or liquidate if the borrower defaults. Because collateral reduces lender risk, secured loans often offer lower interest rates and higher borrowing limits than unsecured loans, though terms vary by provider.

Common examples include mortgages (secured by property), auto loans (secured by a vehicle), and crypto backed loans (secured by digital assets such as BTC).

Key features of secured loans

1. Collateral requirement

Secured loans require the borrower to pledge an asset of value as collateral. This asset protects the lender in the event of non-repayment.

Typical forms of collateral include:

• Real estate (e.g. in mortgages)
• Vehicles (e.g. in auto loans)
• Cash or investments (e.g. in secured lines of credit)
• Digital assets like Bitcoin or Ether (e.g. in crypto lending)

The value of the loan is tied to the value of the collateral, often expressed as a loan-to-value (LTV) ratio. Lenders apply a conservative LTV to reduce risk. For example, a 50% LTV means you can borrow up to half the value of the asset you pledge.

Read more: Crypto Loans vs. Traditional Loans

2. Liquidation risk

One trade-off with secured loans is the risk of losing the collateral if you can’t repay the loan or if its value falls below agreed thresholds.

For volatile assets like crypto, this risk is managed through liquidation mechanisms:

• If the value of the collateral falls too far, the lender may require the borrower to deposit more collateral (a margin call).
• If no action is taken, the lender may liquidate some or all of the collateral to recover the loaned funds.

This protects the lender but creates a risk for borrowers who use volatile assets.

3. Lower interest rates

Because secured loans reduce the lender’s exposure to loss, they usually come with lower interest rates than unsecured loans. This makes them appealing for borrowers with valuable assets and longer-term needs. Lenders are more willing to offer higher borrowing limits and more flexible terms because they have a tangible asset to recover in case of default.

How this applies to Ledn’s Bitcoin-backed loans

Ledn offers secured loans backed by bitcoin. These loans reflect many of the above points, but the exact terms, thresholds, and availability can vary by jurisdiction and are subject to change.

Collateral requirement: Borrowers deposit Bitcoin equivalent to at least twice the amount they want to borrow (50% LTV). For example, borrowing $5,000 requires $10,000 worth of Bitcoin.

Liquidation risk: Ledn monitors the value of collateral. If the loan’s LTV reaches a specified threshold, the borrower may be notified to add collateral. If LTV exceeds a specified liquidation threshold, Ledn may sell a portion of the bitcoin to repay the loan and close the position. These thresholds can change and should be confirmed in the current loan terms.

Auto top up: Borrowers can enable an auto top up feature, which may transfer bitcoin from another Ledn account (where available and configured) to help manage LTV. It doesn’t guarantee liquidation won’t occur.

Rates and funding times: Interest rates and processing times vary (often under 24 hours). Some loans may be processed quickly after verification, but timing depends on jurisdiction, payment rails, and completion of required checks.

Checks and eligibility: No traditional credit checks are required, but identity verification and compliance checks apply.

Availability: Ledn’s loans are available in many jurisdictions, subject to eligibility and local restrictions.

Get a loan backed by Bitcoin.

What is an unsecured loan?

Unsecured loans don’t require collateral. Instead, lenders rely on credit scores, financial history, or protocol-based risk models to assess borrower trustworthiness. Because of the increased risk to lenders, these loans typically come with higher interest rates and lower borrowing limits.

Examples of unsecured loans include:

• Personal loans and credit cards (traditionally)
• Undercollateralised DeFi loans via protocols like Maple or Clearpool

Key features of unsecured loans:

1. No collateral required: Approval is based on creditworthiness or smart contract risk modelling
2. Higher interest rates: To compensate for greater lender risk
3. Faster access: Especially in cases like overdraft lines or personal loans

Unsecured DeFi lending often targets institutions, using transparency, whitelisting, and off chain assessment to manage risk. DeFi lending can also introduce smart contract, oracle, and governance risks, and legal recourse may be limited.

Read more: Crypto Loans Without Collateral: The Complete Guide

The key differences between secured and unsecured loans

Pros and cons of secured loans

Pros:

Lower interest rates: Because the loan is backed by collateral, lenders are exposed to less risk. This often results in more favourable interest rates for borrowers.

Access to larger loan amounts: Lenders are more willing to offer higher loan amounts when they have a valuable asset to recover in case of default.

May be accessible without strong credit: Some secured products don’t require traditional credit checks, though verification and compliance checks still apply.

Cons:

You must provide valuable collateral: To qualify for a secured loan, you need to own a significant asset such as Bitcoin, property, or cash savings.

There is a risk of losing your collateral: If the value of your pledged asset drops and the loan exceeds agreed thresholds, the lender may liquidate part or all of the collateral to cover the loan.

Not always suitable for short-term or urgent borrowing: Setting up a secured loan may take longer than an unsecured one, and the collateral requirement can reduce flexibility for short-term needs.

Pros and cons of unsecured loans

Pros:

No collateral at risk: You don’t need to pledge assets, which removes liquidation risk tied to collateral.

Faster approval and access to funds: Because there’s no collateral to assess or secure, unsecured loans are often approved and funded more quickly, though this varies.

Well suited for short term needs: Unsecured loans are often used for short term borrowing where borrowers don’t want to pledge assets.

Cons:

Higher interest rates: Because there’s no collateral, lenders take on more risk and usually charge higher interest rates.

Loan amounts may be smaller: Lenders may limit how much you can borrow without collateral.

You need strong credit or platform trust: Approval typically depends on credit, income, or platform requirements. In crypto, unsecured DeFi loans are usually limited to known or whitelisted participants.

Who’s using each loan type in 2025?

Secured loans are used by:

• Long-term Bitcoin holders using Ledn to borrow without selling their assets
• Individuals or businesses funding major purchases such as property or equipment
• Investors accessing liquidity while maintaining exposure to rising crypto or asset prices

Unsecured loans are used by:

• Individuals managing short-term expenses such as travel, home repairs, or education
• Borrowers for short-term needs
• Users with strong credit histories or verifiable reputations on DeFi platforms who don’t want to tie up assets

Secured and unsecured loans in crypto lending

Crypto lending spans both categories:

Secured crypto lending (CeFi):

Ledn offers bitcoin backed dollar loans with no traditional credit checks. Identity verification and compliance checks apply, and approval and timing vary.

Other platforms include Nexo, CoinRabbit, and YouHodler.

Unsecured crypto lending (DeFi):

Protocols like Maple Finance, Clearpool, and TrueFi offer institutional unsecured loans using reputation systems and KYC.

The risks are higher, and defaults are harder to recover.

Some crypto platforms are moving toward hybrid models that blend collateral with credit-based elements to optimise capital efficiency and reduce counterparty risk.

Read more: Understanding Crypto Loans: The Ultimate Guide  

How to decide which loan type may be right for you

A secured loan may make sense if you hold valuable assets like bitcoin, prefer lower rates and higher limits, and are comfortable managing collateral and LTV risk.

An unsecured loan may make sense if you need smaller, short term funding, don’t want to pledge assets, and can qualify through credit checks or platform trust requirements.

How Ledn helps you borrow with confidence

If you’re considering a crypto-backed loan, Ledn offers Bitcoin-backed secured loans can be a way to access liquidity without selling BTC. Borrowing may allow some clients to defer capital gains tax in certain cases, but liquidation of collateral can create taxable events. If taxes are relevant for you, it’s best to consult a qualified tax professional.

https://youtu.be/UFVKNWR9cnw

To help borrowers manage risk, Ledn offers LTV monitoring and margin call alerts at specified thresholds. If LTV exceeds a liquidation threshold, Ledn may sell a portion of the bitcoin to repay the loan and close the position. Thresholds and processes are subject to change and should be confirmed in the current terms.

Borrowers can also enable an auto top up feature, which may transfer bitcoin from another Ledn account (where available and configured) to help manage LTV. It doesn’t guarantee liquidation won’t occur.

Ledn combines accessibility with a focus on transparency and risk management. Rates, fees, and product availability vary by jurisdiction and are subject to change.

See how much you could borrow, or open an account.

FAQs

What is the main difference between secured and unsecured loans?

Secured loans are backed by collateral (an asset like Bitcoin, property, or a vehicle) that the lender can claim if the borrower defaults. Unsecured loans don’t require any collateral and are approved based on credit history or platform trust.

Are secured loans safer than unsecured loans?

They are safer for lenders, as they can recover losses by liquidating the collateral. For borrowers, secured loans come with lower interest rates but carry the risk of losing the pledged asset if repayment terms aren’t met.

What happens if the value of my collateral drops?

In secured loans, if the collateral's value falls too much, your lender may issue a margin call asking for more collateral. If you do not respond in time, they may liquidate part or all of your assets to repay the loan.

Why are interest rates lower for secured loans?

Because the lender’s risk is reduced by the presence of collateral, they can offer lower interest rates compared to unsecured loans, where there is no asset to fall back on in case of default.

Can I get a secured loan without a credit check?

Yes. Platforms like Ledn offer secured crypto-backed loans (Bitcoin only) with no credit checks. Loan approval is based on the value of your collateral, not your credit score.

What are the risks of unsecured loans?

Unsecured loans do not require collateral, but they often come with higher interest rates, lower borrowing limits, and stricter approval requirements. Lenders may take legal action if you default.

Who typically uses unsecured loans?

Unsecured loans are commonly used by individuals who need fast access to small amounts of funding and do not want to pledge assets. In DeFi, institutional borrowers with strong reputations may also access unsecured capital.

Does Ledn offer unsecured loans?

No. Ledn currently offers secured loans backed by Bitcoin only. These are designed to help crypto holders access liquidity without selling their assets.

How does Ledn reduce the risk of liquidation?

Ledn offers features like real-time loan-to-value (LTV) monitoring, proactive alerts when LTV hits 70 percent, and automatic liquidation if LTV exceeds 80 percent. Borrowers can also enable an auto-top-up feature, which transfers Bitcoin from a linked savings account to protect against liquidation.

Is a secured or unsecured loan better for me in 2025?

It depends on your financial situation. If you have valuable assets like Bitcoin and prefer lower rates, a secured loan may be best. If you need quick funding, do not have collateral, and have a strong credit profile or DeFi reputation, an unsecured loan might be more appropriate.

Disclaimer

This article is sponsored by 21 Technologies Inc. and/or its subsidiaries (“Ledn”) and is for general information, discussion, or educational purposes only and is not to be construed or relied upon as constituting legal, financial, investment, accounting, tax, estate-planning, or other professional advice or recommendation. Please read Ledn’s full Risk Disclosure Statement and Disclaimers.

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