What is a secured loan?
A secured loan is a type of loan where a borrower uses an asset to back, or secure, the loan. If the borrower can’t repay the secured loan, the lender can take the asset. Mortgages and car loans are two common examples of secured loans.
What you’ll learn:
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Secured loans are backed by the borrower’s assets, called collateral. Collateral may include physical assets, such as a house or a car, or liquid assets, such as cash.
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If the borrower defaults on a secured loan, the lender can seize the collateral to cover their losses.
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Some examples of secured loans include mortgages, car loans, home equity lines of credit (HELOCs) and secured credit cards.
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Because of the collateral, secured loans may have lower interest rates and higher loan amounts and be easier to qualify for compared to unsecured loans.
How does a secured loan work?
A secured loan is a type of loan that’s backed by the borrower’s collateral. That collateral might be a physical asset, such as a car or house. Or it may be liquid assets, such as investments or cash. With a mortgage or car loan, for example, the loan is typically secured by the house or car you bought with it.
When a borrower takes out a secured loan, they agree to let the lender place a lien on their collateral. If the borrower defaults on their secured loan, the lender can take the collateral to cover the unpaid debt. Defaulting on a loan means failing to pay it back as agreed.
Because they’re backed by collateral, secured loans are generally considered less risky by lenders. This means secured loans may be easier to qualify for than unsecured loans. Some secured loans may also have higher loan amounts and lower interest rates.
Secured loans vs. unsecured loans
The main difference between secured and unsecured loans is whether they require collateral. Secured loans require the borrower to back the loan with an asset, like a car, house or cash. Unsecured loans don’t require collateral.
Because unsecured loans aren’t backed by collateral, they typically have stricter eligibility requirements, such as higher credit scores, compared to secured loans.
Types of secured loans
How each secured loan works can vary by lender, loan type and more. But what all secured loans have in common is that they require some kind of collateral.
Here are a few common types of secured loans:
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Mortgages
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Auto loans
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Secured personal loans
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Secured business loans
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HELOCs
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Home equity loans
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Secured credit cards
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Car title loans
Secured loans can be two types of credit: installment loans or revolving credit. Most secured loans are installment loans. Installment loans are closed-ended loans where the borrower receives a lump sum and pays it back in regular monthly payments. Mortgages and car loans are two examples of secured installment loans.
Some secured loans, such as secured credit cards and HELOCs, are revolving credit. This means that the account is open-ended and can be used and paid down repeatedly. Secured credit cards require a refundable security deposit. And HELOCs use the equity in a home as collateral.
Pros and cons of secured loans
Secured loans can have some notable benefits. But like all debt, those benefits depend on the terms of your specific loan and whether you use it responsibly. Here are a few potential pros and cons to consider when it comes to secured loans:
| Pros | Cons | |
| Rates and risk | Lenders may offer lower interest rates on secured loans than on unsecured loans, but not always. Make sure to read all the loan terms and conditions carefully before applying. | If you default on the loan, the lender can take your collateral to cover the unpaid debt. If you default on a mortgage, for example, it can lead to home foreclosure. |
| Loan amounts | Secured loans are often used to fund a large purchase, such as a house or car, and may have higher borrowing limits compared to unsecured loans. | With secured loans, the value of your collateral may limit how much you can borrow. |
| Eligibility | Secured loans may be easier to qualify for than unsecured loans. You may be able to get a secured loan with a lower credit score—as long as you can secure the loan with adequate collateral and meet other requirements. | Applying for a secured loan can be an involved, lengthy process. It may include a credit check and steps to verify the value of your collateral. |
| Credit effects | With responsible use, secured loans may offer a chance to build credit. Responsible use includes consistently making payments by the due date. | As with any loan, if you fail to pay back a secured loan as agreed, it could negatively impact your credit. |
Avoiding default on a secured loan
Defaulting on a loan can have negative effects on your credit and finances. But there are steps you can take before and after taking out a secured loan that may help you avoid default.
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Review loan terms. Before you take out any kind of debt, comparing your options and making sure you understand all the terms can help you make the choice that’s best for you. Consider looking into things like interest rates, repayment terms and fees.
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See whether you’re pre-approved. Checking before you apply could help you figure out the loan amount you’re likely to qualify for and avoid unnecessary hard inquiries.
- Don’t wait to get support. If you’re struggling with loan payments, the Consumer Financial Protection Bureau (CFPB) says to contact your lender right away. They may have options to help you make your payments. For trouble with mortgage payments, the CFPB also recommends contacting a local Department of Housing and Urban Development-approved housing counseling agency for assistance.
Secured loans FAQ
Here are some frequently asked questions about secured loans:
What credit score is needed for a secured loan?
There’s no one-size-fits-all answer for what credit score you need to get a secured loan. Each lender has its own criteria. Plus, lenders may consider factors outside of credit scores.
What can be used as collateral for a secured loan?
What you can use as collateral for a secured loan depends on the lender’s policies. And in cases of auto loans and mortgages, the collateral is the property the loan is used to pay for. But here are a few examples of collateral that could be used to secure a loan:
- Cars and other vehicles
- Real estate, such as a house
- Cash in a checking account, savings account or certificate of deposit account
- Stocks, bonds and mutual fund investments
- Insurance policies
- Other valuables like equipment, jewelry and collectibles
Are secured loans a good idea?
If you pay back a secured loan on time, it may help you build credit. But whether a secured loan is a good idea depends on your circumstances and financial goals.
Are secured loans bad for credit?
Credit scores are complex and take many factors into account. Payment history can be a major factor in calculating your scores. In fact, it’s the most significant factor that impacts your FICO® score, accounting for 35%. Making consistent, on-time payments on a secured loan may help improve your credit scores.
Taking out a secured loan will increase your total debt, which can also impact your credit scores. FICO says total debt comprises 30% of your score. A secured loan may also help diversify your credit mix, which FICO says makes up 10% of your score.
Key takeaways: Secured loans
Secured loans require the borrower to back the loan with collateral, like a car, home, investments or cash. Mortgages and car loans are two common types of secured installment loans. Secured credit cards are an example of a secured revolving credit account.
Secured credit cards can be tools for building or establishing credit. And with responsible use, cardholders may be able to earn their security deposit back and upgrade to an unsecured credit card.
If you want to explore some options, you can compare secured cards and check for pre-approved card offers. Pre-approval is quick and won’t hurt your credit scores.
