Secured personal loans are a type of loan backed by collateral. When borrowing, you agree to lenders repossessing your collateral if you default on the loan.
Compare this to an unsecured loan, where you won’t need to put up collateral — you’re gaining approval with your credit and guaranteeing payment with your signature.
Secured loans make it easier for those with lower credit scores to borrow — but with the risk of losing the collateral if the loan defaults.
A secured loan means the borrower will back the loan up with collateral, agreeing for it to be used as payment if they don’t pay the loan back. Secured personal loans can be used for a variety of expenses stemming from unexpected medical bills to home improvements or major life events, among other possibilities.
The point of a secured loan is for borrowers to have more of an incentive to make on-time loan payments. It also allows borrowers to take out a more affordable loan even if their credit score is on the lower end.
Depending on the lender, borrowers may have different options on the type of collateral, including vehicles, homes, savings accounts, or some other financial asset.
The following table shows several characteristics of secured loans:
| Annual percentage rate (APR) | The interest rate charged plus origination or application fees. |
| Repayment term | The length of time agreed upon to repay the loan. Varies by lender. |
| Fees | Some lenders charge origination fees, which will increase the loan cost. Also, some loans come with prepayment penalties for paying off a loan early. |
| Borrowing amounts | Varies by lender, though borrowing amounts tend to be higher for loans with higher collateral requirements. |
| Monthly payment | Will vary depending on multiple factors, including whether the interest rate is fixed or variable. When comparing loans, plug lenders’ quotes into a personal loan calculator to ensure you can comfortably afford the payments. |
| Collateral | Will vary depending on the lender. |
| Time to funding | Larger loans may take longer to fund, but many online personal loan lenders disburse funds within a week of approval. |
You can find a secured personal loan from several sources, including banks, credit unions, and online lenders.
This type of financial institution is usually member-based, which means you’ll need to join a credit union to apply for a loan. Depending on the credit union, membership criteria could include applicants who live and work in designated areas or are members of certain professions.
Credit unions may have less stringent requirements since the aim of these not-for-profit institutions is to support their members. However, it’s still a good idea to comparison-shop rates to make sure you’re getting the best deal.
Online lenders let applicants check their rates and apply for a loan from the comfort of their home. In many cases, online lenders offer competitive rates and a wide range of repayment terms.
Related: Learn more about getting a personal loan
Banks typically have a wide range of secured personal loans, though the application requirements may be stricter compared to the other top options mentioned. Rates and fees may be just as competitive as online lenders, especially if you’re already a customer.
Besides secured personal loans, the most common secured loans include those for homes, cars, and credit cards.
Loans for vehicles like cars, boats, and motorcycles are considered secured because they’re backed by the vehicle. If the borrower defaults, the lender has the right to repossess the vehicle.
Borrowers put up their homes as collateral for mortgages or home loans. The property is at risk of foreclosure if the borrower is unable to pay back the loan.
Borrowers can take out personal loans and use the amount they have in their certificate of deposit (CD) to secure it. That way, the lender can seize the amount of money held in the CD if the borrower defaults on the loan.
This type of loan is risky due to factors like high interest rates and the potential to lose your vehicle. How does it work? You put up the title of your car as collateral for a loan. The loan amount is usually small (perhaps a few hundred dollars) and, typically, needs to be paid back within a month.
If you default on the loan, the lender can repossess your vehicle and sell it to recoup the loan. In some cases, you may be able to receive the proceeds of the sale if they’re in excess of what you owe the lender, plus any applicable fees.
With this type of loan, homeowners can tap into their home equity and use their property as collateral. The money comes as one lump sum, which gets paid back over time. A home equity loan can pose a huge risk, though, as you’re agreeing to your home being seized if you’re unable to repay the loan.
A HELOC works in much the same way as a home equity loan, except you’re approved for a line of credit that’s based on your home equity. You’ll have several years to access the line of credit, then you’ll start the repayment period. The same risks apply to your home if you can’t pay back your HELOC.
A secured credit card is one where you’ll need to put down a refundable security deposit that is usually equivalent to your credit limit. For example, if you put down a $500 deposit, you’ll have a $500 credit limit.
Using the card responsibly and keeping up with payments can be an effective way to build credit, but if you default on payments, the card issuer keeps your deposit.
Types of assets you can use as collateral for a secured personal loan include:
If you fail to make payments, your collateral will be turned over to your lender.
Secured personal loans are generally easier to be approved for compared to unsecured personal loans because you’re “guaranteeing” your loan with some sort of collateral. However, your chances of approval will depend on the lender and how much you want to borrow.
- Determine the value of your assets: Depending on the loan, check the value of your collateral, and what you can afford to put down.
- Compare lenders: Shopping around ensures you’ll find a loan that’s the best fit and with the most competitive rates for your financial profile.
- Submit an application: Once you pick a lender, fill out an application (online is simplest) and provide any necessary documentation.
- Sign closing documents: If the lender approves your loan, you’ll need to sign closing documents and other necessary paperwork to receive your loan proceeds.
A secured personal loan may be a smart option if you’re looking to build your credit and don’t have other means of getting approved for loan, such as attaching a co-signer or co-borrower to your application. It’s also best for those who have a clear plan to pay back the loan without risking losing their collateral.
It’s best to weigh your options (including looking at alternatives, below) before making a decision.
If you feel a secured personal loan isn’t for you, take a look at a couple of alternatives.
If you have good credit, you may be better off looking at unsecured loans. You won’t need to put up any collateral, and may even qualify for more competitive rates and terms. You can also improve your chances of loan approval — and a lower APR — if you have a creditworthy co-applicant.
Related: Learn more about getting a personal loan
Borrowing money from a family member or close friend can have advantages. But it’s crucial to have a detailed conversation with the person who will lend you money before finalizing a loan. You don’t want to put the relationship at risk.
It’s best to work out an agreement much like you would with a lender — how much will you borrow, how will you repay the loan, and when will the loan be fully repaid? Consider putting the agreement in writing so both parties understand exactly how the loan will unfold.