What is a secured loan?
A secured loan is a type of debt backed by collateral, which is something you own, such as a house, car or savings account. There are different types of secured loans, but they all have one thing in common: If you fail to repay the loan, you can lose your asset.
How much you can borrow: Loan amounts vary with secured loans and are often determined by the value of the collateral. For example, a secured home loan, or mortgage, typically covers the value of the house minus your down payment. The same goes for an auto loan. A pawn lender puts a price on your property and loans that amount.
Rates and terms: Rates and repayment terms vary on secured loans, but larger loans generally have lower rates and longer repayment terms. A pawn loan may have a triple-digit interest rate and be due in a month, while a mortgage may have a single-digit interest rate and be repaid over decades.
Secured loans also tend to have lower rates than unsecured loans because pledging collateral gives the lender something to take and sell if you fail to repay, lowering the lender’s risk of losing money.
How do secured loans work?
Banks, credit unions and online lenders offer secured loans. The lender typically reviews your collateral, credit and finances to determine your eligibility. The process often includes a hard credit inquiry, but some secured loans don’t require it.
Most secured loans have fixed interest rates, meaning you’ll repay the loan in equal monthly installments. If the lender reports payments to the three major credit bureaus, on-time payments will build your credit, but missed payments will damage it. After multiple missed payments, the lender can take your collateral.
🤓Nerdy Tip
Car title and pawn loans are examples of no-credit-check secured loans. To make up for the risk of not checking how you’ve previously managed credit and assessing your ability to repay the loan, these lenders charge triple-digit rates that make the loan difficult to repay.
Types of secured loans
|
||
|
The vehicle you’re purchasing. |
|
|
|
||
|
Your certificate of deposit. |
|
|
|
||
|
||
|
The home or property you’re purchasing. |
||
|
||
|
Typically a vehicle, savings or investment account. |
|
Is a payday loan secured or unsecured?
Is a small business loan secured or unsecured?
Is a personal loan secured or unsecured?
Are student loans secured or unsecured?
🤓Nerdy Tip
Collateral is the key to knowing whether a loan is secured or unsecured. If you’re pledging something the lender can take upon failure to repay, it’s a secured loan.
Pros and cons of secured loans
Pros
-
Rates can be lower than unsecured alternatives.
-
Credit requirements may be softer.
-
Fixed rates keep monthly payments predictable.
Cons
-
You risk losing your collateral if you fail to repay the loan.
-
Funding time may be slower while the lender assesses collateral.
How to get a secured loan
-
Check your finances. Review your budget before getting any loan to understand how much you can put toward monthly repayments. Use a loan calculator to see how the interest rate and repayment terms affect the monthly payment. Check your credit reports for any errors or past-due accounts you can resolve before applying. You can get your reports for free at AnnualCreditReport.com or on NerdWallet.
-
Review the collateral. If you’re using collateral to lower your rate or get a larger loan, check its value before you apply. You can use an online pricing guide to check a car’s value for an auto-secured loan, review your savings and investment accounts for an account-secured loan or take a personal item to multiple pawn shops to see which gives the highest valuation.
-
Compare lenders. Look for a secured loan with a low rate and affordable monthly payments. Lenders may weigh collateral, credit and income differently, so it pays to compare. If your bank or credit union offers secured loans, start there to see if they’ll include customer perks or discounts.
-
Apply. The application process is different for all types of secured loans. You may be able to get a secured loan online, while some banks and credit unions require an in-person visit. Applications for a secured loan may take longer than an unsecured loan because the lender must evaluate your collateral.
What if you don’t repay a secured loan?
If you default on a secured loan, the lender can repossess your asset, sometimes without notice. If your home goes into foreclosure, you may end up in court.
In addition to losing your collateral, your credit and finances could suffer for years. Here are some potential consequences:
-
Repossession or foreclosure on your credit report for up to seven years.
-
Difficulty accessing credit in the future.
-
Still owing money on repossessed assets.
-
Filing for bankruptcy to keep your property.
Tips to avoid defaulting on a secured loan
-
Communicate with your lender. There are no consequences to your credit or finances for telling your lender you’re concerned about missing a payment as long as you call before you miss it. The lender may even be able to help: Some companies have hardship programs that include payment deferrals or lower monthly payments.
-
Request a new payment date. If you’ve got a new job or added bills that make the loan’s payment date challenging to honor, request a different payment date. You may also be able to change the payment frequency.
-
Seek credit counseling. A nonprofit credit counseling agency can provide budgeting help, debt management plans and housing counseling. Some assistance may be free.
-
Ask for help. If a trusted friend or family member can provide financial assistance, ask for it. Though it may be a difficult request, it could keep you from losing your property or savings.