Secured Loan
Secured loan summary:
Secured loans require collateral. Collateral is something valuable that guarantees the loan. If you don’t repay the loan, the lender could take the collateral.
Collateral lowers the risk of loss for the lender, so secured loans often have lower interest rates compared to other kinds of loans.
Some of the most common types of secured loans are mortgages and car loans.
Secured loan definition and meaning
A secured loan is guaranteed by valuable collateral. Auto loans, boat loans, mortgages, and pawn shop loans are examples of secured loans. The lender can take back the collateral—the car, boat, home, or personal item—if you don't pay back the loan.
Key concept: If you default on a secured loan, your lender can claim the collateral used to guarantee the loan.
More about secured loans
When you borrow with a secured loan, you have to put up collateral. Collateral is something of value you own that the lender can take, or repossess, if you don't repay your balance according to the terms of your loan agreement. The lender can then sell the collateral and get its money back.
The most common secured loans are mortgages and auto loans. If you don't pay your mortgage, the lender can foreclose, a legal process that gives the lender the right to sell your property and keep what they're owed. If you don't pay your auto loan, the lender can repossess the car and sell it.
Advantages of a secured loan
Secured loans are less risky for lenders than unsecured loans because they can take your collateral to cover their losses if you don't make your payments as agreed. Less risk generally translates to lower interest rates and/or easier loan approval.
If you don't mind putting up collateral for a loan, you may get a lower interest rate. If you're having a hard time getting approved for an unsecured loan, you might have better luck with a secured loan. Getting a secured loan and handling it responsibly could help you create positive credit history, improve your credit score, and make future borrowing cheaper and easier.
Disadvantages of a secured loan
Secured loans have a couple of drawbacks. They can take longer to get, because the lender has to make sure that the collateral has enough value and that you have legal ownership. And if you don't make your payments as agreed, you could lose your collateral.
Common types of secured loans
Secured lines of credit
Pawn shop loans
Life insurance loans
Your collateral could be the item you’re buying with the loan, or something else. Secured credit cards, secured lines of credit, and savings- or share-secured loans are backed by money that you deposit with the lender. After you pay as agreed for a time, the lender may return the collateral (money) to you.
Secured Loan FAQs
What is the difference between a secured and unsecured loan?
A secured loan requires collateral. Collateral is something valuable that you pledge as a guarantee that you’ll repay the loan. If you don’t repay the loan, you could lose the collateral. A common example is a house, which is the collateral for a mortgage. Collateral is a financial safety net for the lender.
With an unsecured loan, you qualify based on your credit standing and the financial information you provide. If you fail to repay the loan, the lender can’t take anything you own to cover its losses. Of course, they could (and probably will) pursue you in other ways for repayment of the loan.
Why does an unsecured loan have a higher interest rate than a secured loan?
Because they aren't attached to collateral, unsecured loans are a little riskier for the lender than secured loans. If something happens and you don’t repay the loan, the lender could lose money. In general, we pay more for financial products that lenders consider riskier. So if you were to shop on the same day for an unsecured personal loan and a car loan, the average interest rate for car loans would probably be lower than the average rate for personal loans.
What type of personal loan is easiest to get approved for?
Some personal loan providers focus on borrowers with lower credit scores or income. You can search for those providers online if that's an issue for you.
Another option is to look for secured personal loans, which require collateral. Collateral is something valuable that you offer as a guarantee that you'll repay the loan. It's common to use a savings account as collateral for a secured personal loan. Some lenders will also consider letting you borrow against collectibles, fine art, a vehicle, or other items of value.
Lenders consider secured loans less risky because they can take the collateral if you don't repay your loan.
You could also add a co-borrower with better credit or additional income to strengthen your application. That can help you get approved or get you a better loan. At Achieve, we offer interest-rate discounts if you have a co-applicant—check your eligibility.
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