Finance
Loans
Best Personal Loans
What is a secured loan?

What is a secured loan? (2023)

Putting down collateral could help you get the funding you need

Written by

Edited by

Updated: 07/21/2023

Find Personal Loans near you

Learn about personal loans

A secured loan is a loan backed by some type of collateral, such as a vehicle or real estate. If you don’t repay the loan, the lender can seize the collateral and sell it to get its money back.

Secured loans are easier to qualify for than unsecured loans (which only require a signature, with no collateral) because they are less risky to the lender. However, the risk increases for the borrower because of the potential loss of a valuable possession should they default on the loan.

Key insights

Secured loans require collateral, such as a home, vehicle or cash.
Secured loans often feature lower interest rates, but the borrower can lose the asset used as collateral if they default on the loan.
While the qualification process is typically easier for secured loans, the application process may take longer.

How do secured loans work?

A secured loan can help you access money for almost any reason. However, it’s important to understand how they work before you take one out.

Once approved for a secured loan, you’ll get funds and start repaying the lender. You'll pay a portion of the principal (the total borrowed amount), along with interest in most cases.

Once you pay off the loan in full, the lender releases any lien on the collateral. If you fail to make payments at any point, the lender may seize your asset and sell it to get its money back.

Types of collateral you can and can’t use

The lender generally uses the value of the collateral as a significant factor when approving a secured loan. Whether it’s a home, car, RV or other possession, a lender is unlikely to give you more than the current appraised value — otherwise, it couldn't recover the full value of the loan.

Depending on the type of secured loan, collateral options may include:

Monetary savings
Car, boat or home
Stocks and bonds
Precious metals
Fine art and collectibles
Future paychecks

Most lenders do not allow retirement accounts, such as a 401(k) or individual retirement account (IRA), as collateral. Lenders may also place restrictions on the collateral, such as not using a vehicle older than 7 years.

» MORE: Secured vs. unsecured loans

Types of secured loans

Most secured loans work in a similar way: The borrower puts up collateral the lender can use to recover its funds if the loan goes into default. However, the type of secured loan determines how you can use the funds.

The qualifications for different types of secured loans depend on multiple factors, including your credit history, credit score, income, debts and the item used as collateral.

Personal loans: With a secured personal loan, the collateral can be any of a number of items, such as a vehicle you own, cash in a savings account or real estate. You receive a lump sum of money, which you then pay back in installments (usually monthly).
For example, if you own a car free and clear, you can borrow money against it using a secured personal loan. The lender will first inspect and appraise the vehicle to determine how much you can borrow.
Mortgages: Mortgages are one of the most common forms of secured loans. When you take out a mortgage, the home you are buying is the security for the loan. Mortgage lenders request an appraisal, then lend up to 100% of the purchase price of the home — although most loans require a down payment.
If you fail to make payments on the loan, the lender can force the sale of the home through the foreclosure process.
Business loans: Business loans are typically backed by business equipment, inventory, savings, real estate or other company assets. Secured business loans can go toward purchasing equipment, vehicles, capital needs, expansion and debt refinancing.
These loans generally have lower interest rates and longer repayment periods than personal loans, making them ideal for growing or scaling a business.
Home equity loans: A home equity loan is a type of second mortgage that lets you borrow money using your home equity as collateral. You might use the lump sum you get from a home equity loan to make home improvements, consolidate debt, pay for a child’s education, make a large purchase or just about any other purpose.
As with a mortgage, failing to pay back the loan could result in foreclosure.
Auto loans: Auto loans cover the purchase of a vehicle. The vehicle serves as collateral, which means failure to make payments on the loan can result in repossession of the vehicle by the lender.
An auto loan features a fixed interest rate and predictable payments, which can make it simple to budget for a vehicle purchase.
Secured credit cards: A secured credit card works similarly to an unsecured credit card, except you put down a deposit with the credit card issuer to secure the credit. For example, you could get a secured credit card with a $500 limit if you put down a $500 deposit.
Secured credit cards are often a good option for those who need to build or rebuild their credit. By making your payments in full and on time each month, you can grow a positive credit history and eventually qualify for an unsecured card.
Title loans: A title loan is funding given to a borrower in exchange for the title of their car as collateral. If the loan isn’t paid back within the term — typically 30 days — the vehicle gets towed and belongs to the lender.
Note that title loans involve a tremendous amount of risk due to the high fees and possible vehicle repossession; they are not legal in every state.

Pros and cons of secured loans

Secured loans offer several key benefits, like lower interest rates, because they are less risky for lenders. There is one big downside to these loans, though: If you fail to pay back the lender, you could possibly lose a valuable asset, like funds in a savings account, a vehicle or your home.

Pros

Easier qualification process
Generally lower interest rates than unsecured loans
May help you build credit over time

Cons

Application process takes longer
Potential loss of your property if the loan is unpaid
Possibly fewer loan options than unsecured loans

How to get a secured loan

You can get a secured loan from banks, credit unions, specialized lenders and online lenders.

To apply for a secured loan, you’ll have to supply the following information:

ID
Proof of address
Proof of income
A list of your current debts
The collateral you are using (e.g., vehicle title and proof of insurance for a title loan)

Each lender sets its own qualifications for secured loans, including income, credit score and debt-to-income (DTI) ratio requirements. The application process at each lender may be slightly different.

Before you start looking at lenders, it’s smart to review your credit report to check for any inaccuracies.

Keep in mind that you should only put down collateral you’re confident you won’t end up losing.

How to get a secured loan with bad credit

One of the advantages of secured loans over unsecured loans is you are more likely to receive approval if you have bad credit.

The minimum credit score depends on the lender and the type of secured loan you need. Some lenders don’t have a minimum credit score, but keep in mind that having a lower credit score usually translates to paying a higher interest rate.

Credit isn’t the only factor that matters when applying for a secured loan. In many cases, you can still qualify for a loan with a bad credit score as long you have sufficient income, a lower DTI ratio and collateral that meets the lender’s criteria.

» MORE: How to fix your credit

What to look for in a secured loan

As you’re shopping around and comparing multiple lenders for a secured loan, make sure to consider each of the following factors.

Collateral: Confirm what type of collateral you need to secure the loan. Consider if the required collateral is worth risking, such as your home with a home equity loan or vehicle with an auto loan.
Loan amount: Each provider has its own range for loan amounts. Your credit score and other factors influence how much you can borrow.
Credit score and other requirements: Note the minimum credit score the lender will consider for a loan, plus any other income or credit requirements.
Interest rate: The lowest interest rates are generally reserved for those with the highest credit scores. Some loans include a fixed interest rate, which stays the same the entire length of the loan, while others have a variable rate, which fluctuates with the market. “Assess your financial stability and ability to handle potential interest rate changes. If you have a stable income and can comfortably handle higher payments, a variable-rate loan might be an option. If you prefer a more predictable budget, a fixed-rate loan may be preferable,” advised Joseph Catanzaro, a financial advisor at Oak & Stone Capital Advisors in Ambler, Pennsylvania.
Repayment terms: “Consider the length of the loan term,” Catanzaro said. “Longer terms may have higher overall interest costs but lower monthly payments. Shorter terms may result in higher payments but lower interest costs over time.”
Lender’s fees: Lenders often include multiple types of fees in a loan, such as origination fees, administrative fees, prepayment penalties and late fees.

FAQ

What credit score do you need for a secured loan?

Minimum credit scores vary depending on the type of secured loan you’re applying for and the lender. For example, a secured credit card might not even require a credit score because you’re using a security deposit as collateral, whereas some mortgage loans might require a credit score of at least 620.

How much can I borrow with a secured loan?

How much you can borrow depends on the lender and the type of secured loan. For instance, lenders limit the loan amount on a mortgage to the amount the property appraises for, whereas a secured personal loan may range from a few hundred dollars to over $100,000.

Can I use a secured loan for any purpose?

Secured personal loans have a wide variety of approved purposes, from debt consolidation to home improvement projects to paying household bills. Some lenders do place restrictions on the use of funds.

What happens if I default on a secured loan?

If you default on a secured loan, the lender can repossess the asset you used as collateral. It is also recorded on your credit report as a loan default, which has a significantly negative effect on your credit score and may make it harder to qualify for other loans in the future.

Bottom line

People use secured loans every day to buy homes and purchase new and used vehicles. You can get a secured personal loan to use for just about anything. Secured loans have many benefits over unsecured loans, but they also come with greater risks.

Take time to research lenders and offers, and make sure you are comfortable with the terms of the loan so you can borrow what you need and keep a valuable asset in your possession.

Article sources

ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include: