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. 

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 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 credit cards

• Secured lines of credit

• Share-secured or savings-secured loans

• Car title loans

• 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.