Secured vs. Unsecured Loans in Denver, Colorado: How to Choose

Almost every loan falls into one of two groups, and knowing how secured vs unsecured loans in Denver differ can save you money and protect the things you rely on. With a secured loan you pledge something you own. With an unsecured loan you do not. This guide explains each type, shows what they can cost, and points to safer choices for Denver, Colorado residents.

What “secured” and “unsecured” mean

A secured loan is backed by collateral, an asset the lender can claim if you do not repay, such as a car, a home or money held in an account. An unsecured loan has no collateral. The lender decides based on your credit history, income and other debts.

The trade-off is risk. Collateral lowers the lender’s risk, which can mean a lower rate or a bigger loan. But it moves some risk to you, because you could lose the asset.

Common secured loans

• Mortgages are secured by the home.
• Auto loans are secured by the vehicle you buy.
• Savings-secured loans are secured by money you keep on deposit at the lender.
• Car-secured cash loans are secured by a vehicle you already own.

The first three are common products from banks, credit unions and auto lenders. The last one carries the most danger, and we cover it below.

Common unsecured loans

Credit cards, most personal loans, student loans and many small installment loans are unsecured. If you fall behind, the lender cannot simply take a particular item. It can send the account to collections, report late payments to the credit bureaus and, in some cases, sue and ask a court for a judgment. Unsecured does not mean consequence-free.

How Colorado’s rules shape the choice

Colorado is a 36% APR state for small loans. Voters approved Proposition 111 in November 2018, and it took effect February 1, 2019. It capped what used to be called payday loans, known in the law as deferred deposit loans, at 36% APR. Before that, these loans averaged well over 100% APR, and since the cap most payday storefronts in Colorado have closed.

Under the Deferred Deposit Loan Act, a lender may not lend more than $500 to one consumer at any time, and the minimum term is six months. Today’s legal product is best described as a small installment loan capped at 36% APR. Other installment and personal loans from finance companies are “supervised loans” under the Colorado Uniform Consumer Credit Code, and the lender must hold a license. Because details vary, ask for the APR in writing. Our page on the Colorado Uniform Consumer Credit Code explains the basics.

A worked example: a small unsecured loan

Say a Denver worker needs $500 and takes a six-month loan at the 36% APR cap, repaid in six equal monthly payments:

• Loan amount: $500
• Monthly payment: about $92.30
• Number of payments: 6
• Interest: about $53.79
• Total repaid: about $553.79

A $300 loan on the same terms costs about $32.28 in interest, with payments of about $55.38 and a total of about $332.28. If you repay early, the lender must refund a prorated share of the finance charge for the time left. You may also cancel a deferred deposit loan by 5 p.m. on the next business day after you get it. To compare offers fairly, read about APR versus interest rate.

Car-secured loans: the riskiest collateral

Colorado has no separate car-title loan law. A loan secured by your car is a consumer loan that must follow the Uniform Consumer Credit Code and be made by a licensed lender. That does not make it safe. If you cannot pay, you can lose your car.

In Denver that risk is bigger than it sounds. Many people drive to jobs in hospitality, health care and construction, and getting around the metro area without a car is hard. Hail also damages vehicles here every spring and summer, so call your insurer first if your car is hit. Our guide to car title loans in Colorado has more detail.

Savings-secured and credit-builder loans

If you have some savings but a thin credit file, a savings-secured or credit-builder loan can be a low-risk way to borrow. The collateral is money you set aside, not a car you need to commute. Many credit unions offer products like this, but membership rules and terms differ, so check with each one.

Here is an illustration only, not an offer. If you borrow $1,000 at 18% a year over 12 months, the payment is about $91.68 a month and the total interest is about $100.16. Ask whether the lender holds your deposit until the loan is paid off and whether on-time payments are reported to the credit bureaus. If they are, the loan can help your score over time.

The middle ground: secured credit cards

A secured credit card works like a regular card, but you put down a deposit that backs your limit. It is a way to rebuild credit without a large loan. Read the fee schedule and the APR first, and pay the balance in full each month if you can. Ask whether the issuer ever moves customers to an unsecured card after a run of on-time payments.

What happens if you cannot pay

With a secured loan, the lender may take the collateral, and you may still owe money if it sells for less than the balance. With an unsecured loan, the lender can pursue collection and may sue. In Colorado, small claims cases up to $7,500 are heard in county court, and in Denver that is the Denver County Court.

One protection applies to small loans: you cannot face a criminal penalty for taking a deferred deposit loan or because a check bounces, unless the account was closed before the agreed date. A lender may charge one returned-payment fee of no more than $25 per loan, and no other default fees. If a collector is suing or pressuring you, Colorado Legal Services helps low-income residents with civil problems such as debt collection.

Questions to ask before you sign

• What is the APR, in writing, and what is the total I will repay?
• Is this loan secured, and what exactly can the lender take?
• Is the lender licensed in Colorado?
• Do I get a refund of unused finance charges if I pay early?
• Are there any fees besides interest?

Active-duty service members and covered dependents also have a Military Lending Act cap of 36% MAPR, a broader measure that includes most fees. Veterans, retirees and civilian workers are not covered.

Check the license, especially online

Online and out-of-state lenders must follow Colorado law when they lend to Coloradans and should hold a Colorado license. Some claim tribal ownership or a bank partnership that they say puts them outside state rules. A court challenge over some of these arrangements is not settled, so do not assume anything. Search for the lender at coag.gov, the Colorado Attorney General’s site, before you borrow. If a lender asks you to pledge your car title for a small loan above 36% APR, walk away.

Cheaper options to try first

Before you borrow against anything, look at lower-cost choices. A Denver credit union may offer a small personal loan or a payday alternative loan. Federal credit unions charge at most 28% interest plus an application fee of at most $20 on these loans. If your credit is rough, see bad credit loan options in Denver.

For a past-due energy bill, ask Xcel Energy about a payment arrangement, and look into LEAP through Colorado PEAK or Energy Outreach Colorado. Dial 2-1-1 to reach Mile High United Way for help with rent, food and utilities.

This article is educational and is not financial or legal advice. Before you borrow, confirm the lender is licensed with the Colorado Attorney General — Consumer Credit Unit (UCCC Administrator), and read the fee disclosure in full.