What is a personal loan?
You can take out a personal loan for various purposes, then pay it back in monthly installments. Read more about how this kind of loan works.
Josh Richner
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.
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.
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:
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
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.
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.
If you fail to make payments on the loan, the lender can force the sale of the home through the foreclosure process.
These loans generally have lower interest rates and longer repayment periods than personal loans, making them ideal for growing or scaling a business.
As with a mortgage, failing to pay back the loan could result in foreclosure.
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 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.
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.
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.
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:
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.
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
As you’re shopping around and comparing multiple lenders for a secured loan, make sure to consider each of the following factors.
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 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.
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.
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.
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.
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