Personal Loans » Advice » What Is a Secured Personal Loan?
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What Is a Secured Personal Loan?

Secured personal loans are loans that require collateral to borrow. What are the pros and cons, is it build credit and what is a collateral?
Author: Baruch Mann (Silvermann)
Baruch Mann (Silvermann)

Writer, Contributor

Experience

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
Interest Rates Last Update: April 15, 2024
The banking product interest rates, including savings, CDs, and money market, are accurate as of this date.
Author: Baruch Mann (Silvermann)
Baruch Mann (Silvermann)

Writer, Contributor

Experience

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
Interest Rates Last Update: April 15, 2024

The banking product interest rates, including savings, CDs, and money market, are accurate as of this date.

You can trust the integrity of our unbiased, independent editorial staff. We may, however, receive compensation from the issuers of some products mentioned in this article. Transparency is a core value for us, see how we make money.

Table Of Content

What Is a Secured Personal Loan?

Secured personal loans are loans that require collateral to borrow. If you default on a secured personal loan, the lender seizes the collateral you used to secure the loan.

You can borrow secured personal loans at credit unions, banks, and online lenders. Before you take a secured personal loan, there are things you need to consider, including:

You can easily qualify for secured loans because they are less risky. Also, the loans have lower interest rates. However, secured loans might not be the best option for you and

How Does It Work?

You must have an asset to use as collateral to qualify for a secured loan. Also, the lender uses your credit score and financial health to assess your eligibility for a secured personal loan.

The eligibility criteria of such loans are less stringent, and you can access them even if you have bad credit. Moreover, the interest rates are lower because secured personal loans are less risky.

The lender determines the type of asset you can use as collateral for secured personal loans. For example, some lenders allow you to use savings and certificate of deposit accounts, while others use insurance policies, investments, cars, art, and property.

Pros and Cons of Secured Personal Loans

When you apply for a secured personal loan, you reveal the assets you plan to use to secure the loan to the lender. The lender places a lien on the valuable asset until you repay the loan in full.

There are pros and cons of borrowing secured personal loans.

Pros
Cons
Better Loan Terms
Losing Collateral Risk
Many Lenders Offer Them
Fewer Options Than Unsecured Loans
Good For Bad Credit
Limited Loan Amount

Since secured personal loans are less risky, most lenders charge low-interest rates. Also, you have a larger borrowing limit, and you can get a longer repayment period.

You may qualify for tax deductions on interest paid when you borrow secured personal loans.

Several financial institutions offer secured personal loans. As a result, you can compare different lenders' terms before making a decision.

You can still borrow secured personal loans even if you have a poor credit rating. If you repay the loan promptly, you can improve your credit score and overall loan eligibility.

As much as several lenders offer secured loans, the options are fewer compared to unsecured personal loans.

Therefore, you may be forced to consider alternatives if you do not qualify for the existing options.

When borrowing a secured personal loan, you put your asset up as collateral for the loan. You could lose your asset if you fail to repay the loan on time.

Also, you cannot use the funds the way you choose because your loan must be used for the intended purpose.

You cannot borrow a higher loan amount than your collateral can support. The value of your collateral ends up limiting your loan amount.

Therefore, if you do not have sufficient assets to cover your loan, it becomes impossible to borrow the loan you need.

How Secured Personal Loan Can Build Credit?

It might be difficult to achieve your financial objectives if you are struggling with no credit or bad credit.

However, there are different things you can do to boost your financial outlook. For example, using a secured loan to improve your credit.

If you can afford monthly payments for the life of a personal secured loan and make prompt payments, the loan can help improve your credit score.

Payment history is an important factor in calculating your credit score. Therefore, when you make prompt loan payments, it helps in building and rebuilding your credit.

If you have experienced past credit difficulties, you might have bad credit habits that you need to break.

Also, you must do your best not to fall behind on a secured personal loan. Defaulting can make you lose your asset and adversely affect your credit score.

Why Secured Personal Loan Is a Good Option if You Have Bad Credit?

Secured personal loans can help you get a loan you could not have qualified for without the collateral.

The collateral lowers the loan risk, and you can get it even with bad credit. Also, secured personal loans can help you build your credit. Also, loan rates tend to be lower because the lender can possess the collateral if you fail to make monthly repayments.

Some lenders have no minimum credit score requirement but charge higher interest rates in return. Secured personal loans offer good rates, and you can borrow the loans to improve your bad credit and consolidate debt.

If you have good credit, you can get lower rates. However, you may be charged high-interest rates if you have bad credit.

Repayment terms depend on the collateral used to secure the loan. For example, a loan secured by a certificate of deposit lasts as long as the term of the CD.

how secured personal loans work
Secured Personal Loan Is a Good Option if You Have Bad Credit (Photo by bluedog studio/Shutterstock)

When It's Not a Good Idea to Consider a Secured Personal Loan?

When choosing your credit options, you may have to consider between a secured and unsecured personal loan.

Secured loans require that you offer a valuable asset as collateral to secure the loan. On the other hand, you can borrow unsecured loans without putting up your valuable asset against the loan. There are cases when it is ideal to consider secured or unsecured loans.

Below are the cases when considering a secured personal loan is not a good idea.

  • You're Not Sure You Can Pay It Off. Getting a secured personal loan means you are putting your collateral at risk in case you won't be able to pay it off. In addition, there will be huge damage to your credit score in case you won't able to pay your loan.
  • You May Need Your Collateral: Whether it's your emergency fund or your car, you won't be able to touch your collateral until you pay off your loan.
  • Less Valuable Assets. Considering a secured personal loan is not a good idea if your assets are of low value. Such assets can only secure loans of small amounts, which does not make sense considering secured loans are meant for large amounts.

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What to Prepare Before Applying for Secured Loan?

Before you apply for a secured personal loan, there are things that you need to prepare to make the loan application process seamless.

Below are the things to prepare before beginning the loan application process.

  • Documents. It is best to gather all the necessary documents before applying for a secured personal loan. Most lenders require the same documents, including a government-issued ID, bank statements, and W-2 forms.
  • Collateral. It is important to decide the best collateral for your valuable assets. Once you decide on the most appropriate asset, you can evaluate its current market value. Additionally, you need to prepare the documents for the collateral, for example, the car title.
  • Credit report. Although secured personal loans are less risky, the application process requires a hard credit check. Therefore, you need your credit report to facilitate the check. In some instances, lenders offer the ability to prequalify with a soft credit check. Also, you can check your credit score while preparing your credit report and use the information for prequalification or to improve your score.

What Can I Use as a Collateral?

When you borrow a secured loan, the lender puts a lien on the asset used as collateral. After paying off the loan, the lender removes the lien, and you own back your assets.

There are different kinds of assets that you can use as collateral for a secured personal loan, including:

  • Property
  • Bank accounts
  • Cars
  • Insurance policies
  • Stocks
  • High-end collectibles

Some lenders may not accept a car over five years old as collateral. When you fail to pay a secured personal loan, you lose the asset that secures the loan, and your credit also gets a hit.

When you default on a secured personal loan, it remains on your report for seven years and affects your score as long as it’s on the report.

car and home as a collateral for personal loan
Car and home as a collateral for personal loan (Photo by William Potter/Shutterstock)

Factors to Focus on When Choosing a Secured Personal Loan?

When applying for a secured personal loan, you need to do your best to ensure you meet the lender's requirements.

Below are the factors to focus on when choosing a secured personal loan.

  • Collateral – The value of your collateral determines the loan amount you can borrow. Therefore, you can choose a loan based on the value of your collateral.
  • Short Or Loan Term – based on your financial situation, you'll need to understand how much you can allow and if you can pay it off earlier. As soon as you pay it – the more interest payments you save.
  • Credit score – You can consider secured personal loans if your credit is not good to qualify for an unsecured personal loan. Some lenders have credit requirements to qualify for this loan. Therefore, you need to focus on your credit score when choosing this type of loan.
  • Total Cost – Secured personal loans charge lower interest rates, making borrowing less costly. By pledging your valuable assets, you reduce the overall cost of the loan. The interest rate and term you choose determines the cost of the loan and monthly installment.

Understanding the factors to focus on when choosing a personal secured loan helps increase your odds of success. Also, it helps identify the ideal loan that meets your financial needs and can easily repay.

How to Get a Secured Personal Loan?

You can get a secured personal loan by following the steps below.

  1. Check your credit score: Before you apply for a secured personal loan, it is best to check your credit report. The chances of approval are high if you are creditworthy. Although secured personal loans have less strict requirements, it is still important to know your credit score.
  1. Establish the value of your assets: The value of your assets will determine the amount you can borrow. Therefore, you need to appraise your asset or look for the estimated resale value before looking for potential lenders.
  1. Compare different lenders: After establishing the value of the assets you are willing to put up as collateral, you need to shop around and compare the rates and fees of possible lenders. Most lenders allow prequalification, which helps establish whether you qualify for a loan without affecting your credit.
  1. Apply for the loan: After identifying a lender with the most competitive rates and terms, apply for the loan. You can apply for the loan online or visit the lender in person. After applying for the loan and it is approved, you need to be ready to start making prompt monthly repayments every month until the loan is fully repaid.

Alternatives to Secured Personal Loans

Secured personal loans are not the only options if you want to borrow money.

Below are the alternative loans that you may use.

  • Home equity loans. You can borrow money against equity if you own a home. The equity in your home secures the loan, and if you default, you can lose your home.
  • Credit cards. You can use credit cards instead of borrowing secured personal loans. Given that credit cards have high rates, you must always avoid carrying a balance on the card.
  • Low-income grants. If you are a low-income earner, you can check with community organizations to see if you can get grants for whatever you need. You may be able to find grants in your local area to help with medical bills or home repairs.
  • Medical payment plans. You can agree on a workable payment plan if you need medical care but cannot pay the bill in full. Such plans are affordable, and in some instances, the billing department can waive your balance.
  • Peer-to-peer loan. You can borrow a loan funded by investors instead of a secured personal loan from a single lender. Such loans have simpler application processes.

FAQs

You should get a secured personal loan if your credit score is bad and you do not qualify for any other type of personal loan. There are some lenders with no minimum credit requirements to get this loan.

However, the loans are riskier, and you could lose your valuable asset.

Banks offer different types of loans, including secured and unsecured personal loans.

Given that there is no collateral, banks give unsecured personal loans based on your repayment history and credit score.

Banks have legal claims against your collateral or valuable assets in secured personal loans.

Yes, you can pay off your secured personal loan early.
However, depending on the lender, early repayment may cost you some money.

As much as most lenders do not charge you when you repay your secured personal loan early, some may charge a prepayment penalty for paying the loan ahead of schedule.

The maximum amount for a secured personal loan is $100,000. Because of the collateral, most lenders are willing to give large amounts for secured personal loans.

Given that it is a secured loan, the large loan amount has to be backed by the collateral.

Yes. Given that you put the loan up against the loan, there are fees that you pay at the beginning of the agreement.

Also, you pay a valuation fee to estimate the value of the collateral. You can either pay such fees upfront or as part of the loan. 

Yes, secured personal loans have lower interest rates because they are backed by collateral.
Collateral lowers the loan risk, and the lender can repossess the asset if you default on the loan.

For example, you can qualify for secured personal loans with an interest rate of 6%, depending on your credit history, loan term, and the amount borrowed.

Picture of Baruch Mann (Silvermann)

Baruch Mann (Silvermann)

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
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