What Are Secured Loans?

Secured loans are business or personal loans that require some type of collateral as a condition of borrowing. A bank or lender can request collateral for large loans for which the money is being used to purchase a specific asset or in cases where your credit scores aren’t sufficient to qualify for an unsecured loan. Secured loans may allow borrowers to enjoy lower interest rates, as they present a lower risk to lenders. However, certain types of secured loans—including bad credit personal loans and short-term installment loans—can carry higher interest rates. 

Key Takeaways

  • Secured loans are loans that are secured by a specific form of collateral, including physical assets, such as property and vehicles, or liquid assets, such as cash. 
  • Both personal loans and business loans can be secured, though a secured business loan may also require a personal guarantee. 
  • Banks, credit unions, and online lenders can offer secured personal and business loans to qualified borrowers. 
  • The interest rates, fees, and loan terms can vary widely for secured loans, depending on the lender. 

Understanding Secured Loans

Loans—whether they’re personal loans or business loans—can be secured or unsecured. With an unsecured loan, no collateral of any kind is required to obtain it. Instead, the lender allows you to borrow based on the strength of your credit score and financial history. 

Secured loans, on the other hand, require collateral to borrow. In some cases, the collateral for a secured loan may be the asset you’re using the money to purchase. If you’re getting a mortgage for a home, for example, the loan is secured by the property you’re buying. The same would be true with a car loan.

If you default on the loan, meaning you stop making payments, the lender can seize the collateral that was used to secure the loan. So with a mortgage loan, for instance, the lender could initiate a foreclosure proceeding. The home would be auctioned off and the proceeds used to repay what was owed on the defaulted mortgage.

Types of Secured Loans

Secured loans can be used for a number of different purposes. For example, if you’re borrowing money for personal uses, secured loan options can include:

  • Vehicle loans
  • Mortgage loans
  • Share-secured or savings-secured Loans
  • Secured credit cards
  • Secured lines of credit
  • Car title loans
  • Pawnshop loans
  • Life insurance loans
  • Bad credit loans

As mentioned, vehicle loans and mortgage loans are secured by their respective assets. Share-secured or savings-secured loans work a little differently. These loans are secured by amounts you have saved in a savings account or certificate of deposit (CD) account at a credit union or bank. This type of secured loan can be useful for building credit if you’re unable to get approved for other types of loans or credit cards. 

In the case of a secured credit card or line of credit, the collateral you offer may not be a physical asset. Instead, the credit card company or lender may ask for a cash deposit to hold as collateral. A secured credit card, for instance, may require a cash deposit of a few hundred dollars to open. This cash deposit then doubles as your credit limit.

In some cases, a credit card company may convert your account to an unsecured card after you have made a certain number of consecutive monthly payments on time. 

Regardless of what kind of personal loan you’re considering, it’s often wise to first use a personal loan calculator to find the right monthly payment amount, term length, and interest rate to suit your needs.

Business Loans

Business loans can also be secured, though unsecured ones can be had. An equipment loan, for instance, is a type of secured business loan. Say you own a construction business and need to purchase a new dump truck. You could use an equipment loan, secured by the dump truck you plan to purchase, to pay for it. As long as you pay the loan on time, you wouldn’t be at risk of losing the equipment you purchased. 

One thing to note about secured business loans is that you may also be required to sign a personal guarantee. This means that you agree to be personally liable for any debts taken out by your business if the business defaults on the loan. So if your business runs into cash flow issues, for example, you could be personally sued for a defaulted loan.

Car Title Loans and Pawnshop Loans

Other types of secured loans include car title loans and pawnshop loans. Car title loans allow you to borrow money using your car title as collateral. Pawnshop loans can use anything from tools to jewelry to video game consoles as collateral, depending on what you’re willing to pawn. These are generally short-term loans that allow you to borrow small amounts of money.

Car title loans and pawnshop loans can carry interest rates that are well above average compared with other types of secured loans, and if you fail to repay them, you could lose your car or your personal assets held in pawn. 

Life Insurance Loans

A life insurance loan lets you borrow money against a life insurance policy using its cash value as collateral. You could then repay the loan during your lifetime or allow the loan amount to be deducted from the death benefit paid to your beneficiaries when you pass away. This type of loan is available with permanent life insurance policies, such as variable or whole life insurance.

Bad Credit Loans

Bad credit personal loans are another category of secured loans. These are personal loans that are designed for people with poor credit history. Lenders can offer bad credit personal loans, but they may require some type of cash security, similar to share-secured loans, secured credit cards, and secured lines of credit. Note that a lower credit score can translate to a higher interest rate and/or fees with a bad credit secured loan.

Where to Find Secured Loans

Secured loans can be found at banks, credit unions, or online lenders. When comparing secured loans, there are some important things to keep in mind. For example, you’ll want to look at:

  • What type of collateral is required to secure the loan
  • The interest rate and annual percentage rate (APR) for the loan
  • Whether the loan interest rate is fixed or variable
  • Any fees the lender charges, such as origination fees or prepayment penalties 
  • Minimum and maximum loan amounts
  • Credit score and income requirements for the loan

Comparing loan rates and terms with multiple lenders can give you an idea of how much a secured loan is likely to cost. You can also compare them using an online secured loan calculator to estimate your monthly payments and the total amount of interest paid. 

In the case of a secured business loan, you want to be sure to check the requirements for a personal guarantee. While this practice is fairly common with both secured and unsecured business loans, you don’t want to be taken by surprise. And with a secured credit card, it’s helpful to ask the credit card company if there’s any way down the line to have the account converted to an unsecured card and your security deposit refunded to you. 

Do I Have to Have a Relationship With a Bank to Get a Secured loan?

It depends on the type of secured loan. If you’re applying for a share-secured or savings-secured loan, you must have an account at the institution. But if you’re applying for a business loan, home mortgage, or auto loan, you may be able to apply even without an account. You may find better interest rates at an institution where you already have accounts.

Do Secured Loans Have Lower Interest Rates?

Most secured loans do have lower interest rates than unsecured loans. However, there are exceptions—pawn loans and bad credit loans can have very high interest rates, as can title loans. Read the fine print carefully before signing an agreement.

What Happens if I Default on my Secured Loan?

If you miss a payment or default on your secured loan, the lender can seize whatever you used as collateral. That item, whether it’s your car, house, or personal property, can then be sold to recoup the loan amount.

The Bottom Line

Secured loans can often come with lower interest rates since they are less risky for lenders. But remember that if you cannot afford your loan and you default, you will lose whatever asset you used to secure the loan. Assess whether a potential loan fits your budget before borrowing.