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What is a secured loan?
A secured loan is a type of debt backed by collateral, which is something of value that you own, such as a house, car or savings account. There are different types of secured loans, but they all have one thing in common: If you fail to repay the loan, you can lose the asset you pledged as collateral.
Types of secured loans
Here are several types of secured loans and the collateral that’s usually used to secure them.
| Secured loan type | Collateral |
|---|---|
| Your 401(k). | |
| The vehicle you’re purchasing. | |
| Business equipment, property, inventory or other tangible business assets. | |
| Car title loan | Your vehicle. |
| Your certificate of deposit. | |
| The home or property you’re purchasing. | |
| Your home. | |
| A personal item. | |
| Typically a vehicle, savings or investment account. |
How does a secured loan work?
Banks, credit unions and online lenders offer secured loans. Qualifying for a secured loan is typically based on the value of your collateral as well as your credit and finances. You’ll often undergo a hard credit check when you apply for a secured loan.
If the lender reports payments to the three major credit bureaus, on-time payments will build your credit. Conversely, missed payments will damage it. After multiple missed payments, the lender can take your collateral.
Secured loan rates and terms
Most secured loans have fixed interest rates, meaning you'll repay the loan in equal monthly installments. Secured loans tend to have lower annual percentage rates, higher loan amounts and longer repayment terms than their unsecured counterparts, because the lender has something to take if you can’t repay the funds.
Even a pawn loan, which is a secured no-credit-check loan, may have a lower APR than an unsecured payday loan.
Secured loan amounts
Secured loan amounts vary and are often determined by the value of the collateral. For example, a secured home loan, or mortgage, typically covers the value of the house minus your down payment. Similarly, an auto loan will be based on the car’s cost minus your down payment.
If you’re getting a pawn loan, the pawnshop determines the value of your property and loans a percentage of that amount.
Secured personal loans come in amounts ranging from $500 to $75,000.
How to get a secured loan
1. Check your finances.
Review your budget before getting any loan to understand how much you can put toward monthly repayments. Use a loan calculator to see how the interest rate and repayment terms affect the monthly payment.
Check your credit reports for any errors or past-due accounts you can resolve before applying. You can get your reports for free at AnnualCreditReport.com or on NerdWallet.
2. Review the collateral.
If you're using collateral to lower your rate or get a larger loan, check its value before you apply.
You can use an online pricing guide to check a car's value for an auto-secured loan. You should review your savings and investment account balances for an account-secured loan.
If you’re getting a pawn loan, take a personal item to multiple pawn shops to see which gives the highest valuation.
3. Compare lenders.
Lenders may weigh collateral, credit and income differently, so it pays to compare multiple offers. If the lender lets you pre-qualify for a loan before formally applying, you’ll be able to see potential loan offers without a hard credit check.
The loan with the lowest APR will likely be the most affordable option, but also consider the repayment term and monthly payment amount. Ask about secured loan options at the bank or credit union where you have a checking account, because those lenders may also offer rate discounts or customer perks.
4. Apply.
The application process is different for all types of secured loans. You may be able to get a secured loan online, while some banks and credit unions require an in-person visit.
Applications for a secured loan may take longer than an unsecured loan because the lender must evaluate your collateral.
Pros and cons of secured loans
Pros
- May be easier to get than an unsecured loan. Secured loans often have softer credit and income requirements than unsecured loans, because adding collateral removes some of the risk to the lender.
- Lower rates, higher loan amounts. Secured loans may have lower rates and higher loan amounts than unsecured loans, depending on the loan type and lender.
- On-time payments build credit. Like other types of credit, most secured loan payments are reported to the three major credit bureaus, so on-time payments can help build credit.
Cons
- Risk of losing collateral. You can lose your collateral if you don’t repay a secured loan. This could be a life-changing setback if the collateral is something like a 401(k) or your home. Your credit score will also take a hit.
- May take longer to receive funds. Some types of secured loans take longer to fund than unsecured loans. For example, an unsecured personal loan may be approved and funded within a day, but a secured personal loan may take longer since the lender must assess the value of your collateral.
When a secured loan makes sense
You might want to consider a secured loan if:
- You have a low credit score. If you have bad or fair credit (a score from 300 to the low 600s), it may be easier to qualify for a secured loan than an unsecured loan.
- You can get a lower rate. Since secured loans typically have lower rates than unsecured loans, a lower interest rate may be reason enough to get one.
- You can accept the risk of losing the collateral. Even if you have a plan to repay the loan, you face the potential of losing your collateral if your financial situation changes and you miss payments.
When an unsecured loan makes sense
Alternatively, an unsecured loan may be a better option if:
- You need funds fast. Since a secured loan requires the lender to assess your collateral, getting the funds can take longer than if you opted for an unsecured loan, which typically requires just a credit check.
- You don’t want to risk losing collateral. Because unsecured loans don’t require collateral, the lender can’t seize your home, vehicle or savings account to recover funds if you don’t make payments.
🤓 Nerdy Tip
Comparing secured and unsecured loans is mostly about weighing the difference in affordability against the risk of losing your collateral. One way to determine whether it’s worth getting a secured loan is to first pre-qualify for an unsecured loan, if that option is available. Taking the steps to pre-qualify typically won’t affect your credit and can show you the loan amount, APR and repayment term you could get. What happens if you default on a secured loan?
If you miss a payment on a secured loan, the lender may not repossess your asset right away. Your loan contract should include when action can be taken after a late or missed payment.
However, the lender may consider your loan in default after multiple missed payments. This means the lender has determined you’ve failed to meet the obligations of your loan agreement and can take more serious action against you.
Here are the potential consequences if you don’t make payments on a secured loan.
- Late fee: When you miss a payment due date, the lender may charge a late fee. There’s usually a grace period of about 15 days when you can make the payment to avoid the fee.
- Negative credit reporting: If the lender reports to the credit bureaus (like on a mortgage, auto or personal loan), a payment more than 30 days late will likely show up on your credit reports and could have a significant negative impact on your scores.
- Repossession or foreclosure: If you go long enough without paying your secured loan, a lender can take the asset used to secure the loan. A repossession or foreclosure will likely go on your credit report and stay there for up to seven years, making it challenging to access credit in the future. If the asset — a car or house, for example — doesn’t sell for enough to cover the outstanding loan amount, you may still owe the lender money.
What to do if you can’t repay a secured loan
Communicate with your lender
There are no consequences to your credit or finances for telling your lender you're concerned about missing a payment as long as you call before you miss it. The lender may be able to help: Some companies have hardship programs that include payment deferrals or lower monthly payments.
Request a new payment date
If you've got a new job or added bills that make the loan's payment date challenging to honor, ask your lender if you can move your monthly payment date.
You may also be able to change the payment frequency to have smaller biweekly payments rather than a larger monthly payment. Keep in mind that making biweekly payments may mean you’ll pay more per year than if you make monthly payments.
Seek credit counseling
A nonprofit credit counseling agency can provide budgeting help, debt management plans and housing counseling. Some assistance may be free.
Ask for help
If a trusted friend or family member can provide financial assistance, ask for it. Though a family loan may be a difficult request, it could keep you from losing your property or savings.
Frequently Asked Questions
Is a payday loan secured or unsecured?
Payday loans are unsecured because you don’t need to provide collateral to get one. Instead, a payday lender may ask for access to your bank account and withdraw the loan amount, plus a fee, on your next payday.
Is a personal loan secured or unsecured?
Most personal loans are unsecured, but some lenders offer secured personal loans. Best Egg, First Tech Credit Union, Upgrade, Upstart and U.S. Bank are some examples of lenders that offer secured personal loans.
» MORE: Compare personal loans
What collateral do you need for a personal loan?
The type of collateral you need depends on the lender's requirements, but secured personal loans are typically backed by a vehicle, savings or investment account. Securing a personal loan with one of these assets can help you get approved — and may get you a lower rate.
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