How secured loans work
Secured loans work by reducing the lender’s risk through collateral, which can be seized if the borrower defaults. When you apply, you pledge an asset, like a car or house, to back the loan. For example, most auto loans are secured by the vehicle you're buying. This gives the lender a backup plan to recover losses if you stop making payments.
Your collateral can be seized if you don’t pay back your loan.
With secured loans, you can apply for a specific amount, just as you would with other loans. Your lender will check your credit score and history, and you can be approved for various loan terms and rates. But when you sign your loan documents to borrow the money, your lender places a lien on the asset you pledge to secure the loan.
Once you pay off the loan in full, the lender releases any lien on the collateral and any right to seize your pledged asset.
Types of secured loans
There are several types of secured loans, each backed by a specific kind of collateral. Here are some common examples of secured loans:
Home loans
Mortgage loans are secured by your home. If you default, the bank can foreclose and take the property. Also, home equity loans and home equity lines of credit (HELOCs) are secured by your home’s equity, allowing you to borrow against the value you’ve built in the property.
Car loans
Auto loans are secured by the vehicle you purchase with loan funds, and your car can be repossessed if you don’t make payments.
Car title loans let you borrow against your vehicle’s equity. The lender can repossess the car if you don’t repay the loan.
Secured personal loans
Secured personal loans let you pledge an asset to borrow funds for general use. A lien stays on the asset until the loan is repaid. Secured personal loans are generally suitable for people with fair or poor credit, or people who otherwise can’t qualify for an unsecured loan.
Pawnshop loans
Pawnshop loans let you borrow against an item of value. If you don’t repay on time, the pawnshop can keep the item. Pawnshop loans typically have high rates and fees.
Business loans
Business loans often require collateral like equipment or property. You might also need to sign a personal guarantee for a loan, meaning you’re responsible even if the business fails.
Pros and cons of secured loans
Here are a few pros and cons to consider before applying for a secured loan:
Pros
- Secured personal loans may be easier to qualify for with poor credit
- Some secured loans may have higher borrowing limits
- Can usually help improve your credit score over time
- Lets you use your assets as collateral to get a loan
Cons
- Risk of losing your collateral if you miss payments
- Some secured loan options require good credit
- Loan amount typically depends on the value of your assets
- May put essential personal items at risk, like your home or car
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.
Loan qualifications
Lenders generally have a minimum credit score for a loan, and they may have income or other credit requirements.
Interest rate
The lowest interest rates are generally reserved for people 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,” said Joseph Catanzaro, a financial advisor at Oak & Stone Capital Advisors. “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.”
Repayment terms
Like all loans, secured loans will have specified 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.
How to get a secured loan
Secured loans are typically available through a bank, credit union or online lender. You can generally apply for a loan online or at a branch, if available.
1. Review your credit score and report
Before you start looking at lenders, it’s smart to review your credit report and credit score to check for any inaccuracies. You can get your credit report for free from AnnualCreditReport.com, and you can generally get your credit score for free through your online bank account.
2. Compare options and review qualifications
It’s a good idea to compare loan offers and terms from at least a few different lenders. You’ll also want to make sure that you qualify for a secured loan before you apply. 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.
3. Gather information and apply
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 plan to pledge, such as a vehicle title
Keep in mind that you should only put down collateral you’re confident you won’t end up losing.
» COMPARE: Best Secured Personal Loans
Secured vs. unsecured personal loans
Secured loans and unsecured loans are both types of personal loans that offer varying loan terms and competitive interest rates for well-qualified borrowers. While secured loans require collateral, unsecured loans don’t require collateral.
Approval and interest rates for unsecured loans are based solely on a borrower's income, credit score and credit history, while secured loans allow borrowers to pledge an asset as collateral to guarantee the loan.
Here are a few differences between secured and unsecured loans:
Loan approval
Secured loans might have an easier approval process since they require collateral, which reduces risk for the lender. This makes lenders more likely to extend a loan, even if borrowers have bad credit or no credit.
With unsecured loans, lenders rely on a borrower's income, credit score and credit history to assess a borrower’s ability to repay a loan. This can make the approval process lengthier, and it’s typically harder to get approved.
Interest rates
Secured loans often have higher interest rates, particularly if a borrower has poor credit. Unsecured loans typically offer a wide range of interest rates, with the best rates reserved for borrowers with excellent credit.
Loan amounts
The amount you can borrow on an unsecured loan depends heavily on your income and credit score. With a secured loan, you might qualify for a larger amount if the collateral you pledge is valuable enough.
Risk
Defaulting on an unsecured loan can hurt your credit and lead to lawsuits or wage garnishment. A secured loan carries the same credit risks as an unsecured loan, plus the added possibility of losing your collateral. If you can’t repay a secured loan, your collateral is at risk of being seized by your lender and sold to recoup losses.
FAQ
What happens if you default on a secured loan?
If at any point during the loan term you stop making payments and end up in default, your lender has the right to seize your pledged asset and sell it to recover their costs. The lien gives them the legal right to take your property if you don’t uphold your repayment agreement.
Is it better to have a secured or unsecured loan?
Secured loans are generally better for borrowers who have poor credit or no credit history. Unsecured loans are generally better for borrowers with good to excellent credit who don’t want to risk assets to borrow money.
What can be used as collateral for a secured loan?
You can use many different types of items as collateral for a secured loan. For example, you may be able to use cars, boats, RVs, your home, stocks, bonds, jewelry, collectibles or even a life insurance policy.
How can secured loans affect your credit score?
If you make on-time and consistent payments, secured loans can improve your credit score over time. Some types of secured loans, such as mortgages or auto loans, also improve your credit mix, which is a part of your credit score. If you don’t pay a secured loan or miss a payment, your credit score will generally drop.
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:
- Federal Trade Commission, “What To Know About Payday and Car Title Loans.” Accessed Dec. 30, 2025.
