Examples of secured debt - what you need to know

A little financial knowledge can go a long way, especially if you plan to borrow money. 

Secured debts are tied to collateral (that's something of value you own). Collateral could unlock opportunities that would be hard to come by otherwise. For example, with a home equity loan

, your home is the collateral that guarantees the loan. Without collateral, it might be a lot harder to get a loan that’s as big as you need and at a price that’s fair. 

That doesn’t mean that all secured debts are helpful. Let's look at some examples of secured debt and how they work so you can feel confident when you borrow. 

Common examples of secured debt

You're probably familiar with secured debts but might not realize it. In fact, you may have some secured debts already. Here's a rundown of the most common types of secured debts. 

• Mortgage. A mortgage is a loan that's secured by a home. Mortgages make homeownership possible for people who can't plunk down a huge chunk of cash to buy a property. A mortgage is a secured debt. If you don't repay your mortgage, your lender could foreclose, which means they could sell the home to get the money you owe. Mortgages usually last between 10 and 30 years.

• Auto loan. An auto loan gives you money to buy a new or used car. The car is the collateral for the loan, so if you don't pay it back, the lender could repossess your vehicle. Auto loans average around 68 months, or five and a half years. 

• Secured personal loan or personal line of credit. A personal loan or personal line of credit

  (PLOC) could be used to cover anything from debt consolidation to a wedding. Secured personal loans or PLOCs may use a bank account or vehicle as collateral—the lender decides what to accept. A personal loan term is usually between 2 and 7 years. PLOCs can last indefinitely.

• Home equity loan and HELOC. A home equity loan or home equity line of credit (HELOC)

  lets you borrow against your home’s value, with the home serving as collateral. Home equity loans give you a lump sum of money, while a HELOC is a credit line that lets you borrow, repay, and borrow more as needed. It might take up to 30 years to pay off a home equity loan or HELOC. 

• Secured credit card. A secured credit card

  usually requires a cash deposit, which serves as both your collateral and your credit limit. Secured credit cards are usually suited for people who want to build or rebuild their credit history. Some credit card companies will refund your deposit and switch you to an unsecured card after you make a certain number of on-time payments. 

• Title loan. A title loan

  is secured by your car. Most of the time, you need to own your vehicle outright to get a title loan. The amount you can borrow is determined by your car's value. If you don't pay a title loan back on time, you risk losing your car. Title loans usually have a shorter repayment period. It's common for the lender to expect repayment within 15 to 60 days. In some states, title loans are so expensive, they’re considered abusive. 

• Pawn shop loan. Pawn loans let you use personal items as collateral for small short-term loans. For example, you might take jewelry, video game consoles, musical instruments, or power tools to a pawn shop for a small loan. If you don't pay the loan back on time, the pawn shop keeps your collateral. Pawn shop loans are typically expensive.

Secured debt essentially means you're borrowing with backup

. If you can't pay, the lender can keep the collateral you used to secure the loan. That has positive and negative implications for you. 

Pros and cons of secured debt

What can secured debt do for you? And what are the downsides? Let's weigh the pros and cons. 

Pros

• Your interest rates might be lower since there's less risk of loss for the lender. 

• Loan limits may be higher if the value of your collateral is higher. 

• It may be easier to get approved for a secured loan with a lower credit score if you have strong collateral to offer. 

Cons

• You could lose your collateral if you don't repay the loan. 

• Lower rates aren't guaranteed. 

• A larger secured loan, like a mortgage, means a long-term commitment to payments, which could result in financial strain over time. 

• Some secured loans are extremely expensive and are considered predatory or abusive to the borrower.

Do the cons mean you should avoid secured debt? Not at all, and it's sometimes unavoidable if you want to make a large purchase, like a home. 

The key is to make sure any secured debt you take on is a good fit for your budget and overall financial situation. Loan calculators can help you estimate your monthly payments to gauge what you can afford. You can also use them to check your total loan cost with the interest added in. All this information can help you find the best loan option. 

What's next

• Review the types of debt you have and note which ones are secured (or unsecured).

• If you're interested in a new secured loan, like a mortgage or a HELOC, check your credit scores and compare rates from at least three lenders. 

• Consider how you could pay off some of your secured debt faster. For example, you might refinance your mortgage or car loan if you could get a lower interest rate.