What is a secured loan?
Updated 2:10 p.m. UTC Nov. 9, 2023
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Key points
- Secured loans use assets as collateral to ensure the lender gets their money back.
- There is flexibility for access to secured loans such as what types of collateral you use.
- Secured loans can result in your collateral being lost if you don’t make on-time payments.
A secured loan is a personal loan where an asset, also known as collateral, is put up to “back” the loan amount. Lenders can seize collateral if a borrower fails to make their debt payments.
From a borrowing perspective, you might have an easier time qualifying for a secured loan if you have assets to spare, particularly if a thin or poor credit history is inhibiting your ability to take out a lower-risk unsecured loan.
How does a secured loan work?
Secured loans work when you and a lender agree on a set asset as collateral as well as a loan amount of similar value. For example, say you need a loan and your jewelry collection is worth $10,000. You might be eligible to borrow any amount up to $10,000 and set up a payment plan through your lender. Again, if your repayment on the loan goes south, your lender could seize the jewelry, depending on the loan agreement.
Examples of secured loans
Secured loans can take different shapes depending on the collateral you are putting up for the loan. However, here are the three most popular options for secured loans:
- Personal loans: There are unsecured personal loans, and there are secured personal loans. Like the former, the latter can be used to cover most types of personal expense.
- Mortgage loans: As we mentioned in our example above, mortgages are a common form of secured loan. For many consumers, real estate is the largest asset they own and therefore a common place to start when seeking a loan.
- Auto loans: While cars don’t normally yield a high collateral value due to their depreciation, they can still be enough to get a sizable secured loan with the right lender.
- Other vehicle loans: Other vehicle types can also be used as collateral for a secured loan such as off-road vehicles, boats and planes.
Here is a list of other types of collateral that can be used to retain a secured loan. As you can see most of them can be easily liquified to pay back the original loan.
- Real estate.
- Bank accounts (like saving accounts, checking accounts and CDs).
- Vehicles.
- Investments (like stocks, bonds and mutual funds).
- Life insurance policies.
- Precious metals (gold, silver and collectibles).
Pros and cons of secured loans
Here are the potential advantages and disadvantages of secured loans.
| PROS | CONS |
|---|---|
• Good credit scores and positive credit histories aren’t required
| • Collateral could be seized by lenders if repayment goes awry
|
• Lower rates, higher borrowing amounts could be accessible to borrowers who might have limited unsecured loan options
| • Negative credit impact of failing to make payments
|
• Collateral can take many forms, depending on the borrower’s options
| • Repossessed assets might not sell for enough to cover the debt, leaving the borrower responsible to cover the difference
|
Secured loans vs. unsecured loans: What’s the difference?
The main difference between secured and unsecured loans is that secured loans require collateral to obtain the loan while unsecured loans don’t. However, there are various other differences, including:
| SECURED | UNSECURED |
|---|---|
Requires collateral
| No collateral required
|
Easier to qualify
| Must have good credit to qualify
|
Riskier for the borrower
| Riskier for the lender
|
Frequently asked questions (FAQs)
Secured loans are traditionally easier to obtain due to them being less risky for the lender. Unsecured loans, on the other hand, require borrowers to have a higher credit rating, making them a harder loan to obtain for many consumers.
Yes, you can get a secured loan with bad credit. Since you are backing the loan through collateral (such as a home or car), the lender has a way to recoup their losses if you were to default on the loan. This eliminates their risk and lowers the threshold for entry to obtaining the loan.
Like with any loan, making your payments in full and on time benefits your credit report and proves to lenders that you are trustworthy. This leads to increases in your credit score and the odds of you being able to qualify for more loans or lines of credit in the future.
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