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What Is a Secured Loan?

Updated
Dana George
Author: Dana George
Dana George
Dana George
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Dana George has a BA in Management and Organization Development from Spring Arbor University. For more than 25 years, she has written and reported on business and finance, and she's still passionate about her work. Dana and her husband recently moved to Champaign, Illinois, home of the Fighting Illini. And though she finds the color orange unflattering on most people, she thinks they'll enjoy Champaign tremendously.

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A secured loan is a loan "backed" by collateral -- such as a vehicle or house -- that the lender can take if you don't pay the loan. Secured loans can be easier to qualify for and generally have lower interest rates. Here, we'll discuss what a secured loan is, when it's a good idea to take one out, and the risks associated with this type of loan.

Definition of a secured loan

A secured loan is a loan that you get by putting up collateral, like a car or a home. If you miss payments, the lender can sell your collateral to pay back the loan. It can be easier to get a secured loan than other types of loans.

Reasons to get a secured loan

A secured loan might be a good option for you if:

  • Your credit score is low
  • You're looking for a low-interest loan

Remember, though, you risk losing whatever you put up as collateral if you get a secured loan.

If you don't like the idea of getting a secured loan, you're not alone. Low-credit borrowers can look at personal loans for bad credit to find a loan with no collateral and easier qualifying requirements.

What is an unsecured loan?

The opposite of a secured loan is an unsecured loan. An unsecured loan doesn't involve collateral. If you miss payments, the lender can sue you -- but your possessions won't be repossessed or sold right away. However, these types of loans are harder to qualify for. Also, lenders usually charge a higher interest rate for unsecured loans.

What counts as collateral for a secured loan?

Anything a lender can sell if you miss loan payments may be considered collateral. Here are some examples of common collateral used by borrowers:

Other examples of potential collateral include jewelry, coins, fine art, boats, RVs, and ATVs.

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Where can I get a secured loan?

If you're interested in getting a secured personal loan, start by talking to a variety of personal loan lenders. For example, you can get a secured loan with an online lender, bank, or credit union. Shopping around with a variety of lenders allows you to find the best lender for your finances.

Should I get a secured loan?

If you're having trouble qualifying for a traditional loan, a secured loan may be the right choice for you.

If you can qualify for an unsecured loan, that's generally a safer choice. However, unsecured loans can charge higher interest rates than secured loans. If you're trying to save money on interest, you might want to get a secured loan.

Here are some pros and cons to help you determine if a secured personal loan is right for you:

Pros

  • If you don't have the credit score needed for a personal loan, you might still get approved for a secured loan.
  • A secured loan can help you build or rebuild credit.
  • A secured loan may allow you to be approved for a loan on your own when you normally would have required a cosigner.
  • Secured loans often have lower personal loan interest rates.

Cons

  • Anything you pledge as collateral can be sold by the lender if you fail to make payments.

If you decide that a secured loan is right for you, make sure to ask your favorite personal loan lenders plenty of questions. For example:

  • What is your minimum required credit score to get a personal loan?
  • Is it possible that I could qualify for an unsecured personal loan?
  • What interest rate do I qualify for with a secured personal loan? And what interest rate would I get with an unsecured personal loan?
  • What can I use as loan collateral?
  • How long will I have to pay off the loan (what are the repayment terms)?
  • Do you charge an origination fee or other costs I should know about?

Taking out a secured loan is a big decision. You deserve answers to all of your questions before signing on the dotted line and committing yourself to new debt of any kind.

In the meantime, if you're starting from scratch, check out our guide on how to get a loan with no credit.

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