Personal loans can help you take the next step towards finishing home renovations, buying a new car or making a large purchase. Find out how secured personal loans work and what type of loan is right for your financial needs.
A secured personal loan is guaranteed against an asset you own or buy with the loan. You can usually apply for an amount of up to $50,000 — sometimes higher — for terms between one and ten years. If you default on your loan, you will likely lose your asset.
The collateral can come in the form of a number of different items, including: a car, equity in your home, savings and investment accounts or high-priced items such as jewelry or art work.
Is a secured loan the right option for you?
It’s important to determine whether any type of financial product is right for you before you apply. When it comes to secured personal loans, here are some questions to ask yourself:
Can I manage the loan repayments? If you find yourself unable to repay your secured loan, the lender is able to repossess the asset you offered as a guarantee to cover its losses. Aside from losing your asset, you also stand to throw yourself into a spiral of debt and damage your credit score.
Do I have an asset to guarantee as collateral? Lenders will require that you either be looking to buy an asset with your loan (such as a car) or that you already have an asset that meets its criteria. Your asset will likely need to be valued, whether that is a car, a piece of jewelry or fine art.
Do I meet the requirements set by the lender? Lenders will have requirements for the guaranteed asset, such as its age or value. For instance, if you’re using a vehicle as security, it may need to be under a certain age. If you are using a savings or investment account, you may need to have a certain amount in the account to qualify for the loan.
Pros and cons of secured personal loans
Lower rate. These loans are less of a risk for the lender, since you’re providing collateral, and therefore usually come with lower interest rates.
Flexible. Unlike car loans, where you have to purchase the vehicle you’re securing to the loan, you can generally purchase whatever you need to with a secured personal loan as long as the amount doesn’t exceed your secured asset’s value.
Better chance of approval. Offering an asset to secure a personal loan can help you get approved for a loan. This is because the loan is deemed less risky for a lender to take on when there is an asset attached to it.
Risk your asset. When you take out a secured loan, you are guaranteeing your loan with your asset. While this gives you lower interest rates — and ultimately a cheaper loan — it also means you can lose the asset if you default on the loan.
Loan amount tied to your assets value. When you attach your asset to a secured loan, it needs to be valued. This value will then be used to determine the loan amount you are offered.
Loan amounts. Find out the maximum borrowing amount the lender offers and make sure it matches up with the amount you need to borrow.
Loan terms. Generally, loan terms range from one to ten years. Loan terms may only extend up to five or seven years for fixed-rate loans or peer-to-peer loans, so make sure you find a loan with terms that meet your needs.
Assets you can secure to the loan. Lenders have different requirements when it comes to secured loans. You may not be able to secure the asset you are planning to, so check these requirements before you apply.
Fees. Check any upfront fees, such as application or origination fees, as well as any ongoing annual or monthly fees. These will add to the total cost of your loan.
Interest rate. Compare the interest rate that you’re offered to that of other loans in order to make sure it’s competitive. In addition, check the annual percentage rate (APR) of the loan, which will give you a better idea of the true cost of the loan.
Repayment flexibility. Are you able to repay the loan early without incurring a penalty? Can you make additional repayments without being charged? Check these details before you apply for the loan and sign the contract.
What assets can be used as collateral?
Though criteria varies between different lenders, the following assets are commonly used for secured personal loans:
New car. If you’re buying a new car or if you have a car that is less than a few years old, you can generally use it as a guarantee for a secured loan. You can also usually secure a loan with a motorcycle, boat or RV.
Used car. Lenders will also let you purchase a used car with a secured loan. Other vehicles, such as motorcycles, boats or RVs may also be allowed. The vehicle will generally need to be less than seven years old, although some lenders will accept older cars. In addition, cars may need to be of a certain condition in order to be eligible.
Equity in your home. If you own a mortgaged property, you can draw against some equity you have in the property to finance a purchase. You can usually use up to 80% of the value of your home if you outright own the property.
High-cost assets. Some lenders are more flexible with the assets they let you use. If you own expensive jewelry, fine art, precious metals, luxury cars or even some antiques, you may be able to secure it against your loan.
Savings account. Offered by banks and credit unions, you can sometimes use your savings account as security in case you default on the loan. The amount you have in your savings account is usually the amount you can borrow up to.
Before applying for any type of secured loan, it’s important to establish whether you can afford the repayments. If you default on the loan, the asset you’ve used as the guarantee can be taken by the lender and sold to cover their losses.
If you fail to repay the loan or make late repayments, you can risk damaging your credit score.
Comparing lenders to find the most competitive options in terms of rates and fees will help you find the right loan for your budget and needs, so consider whether you’ve done proper research before submitting your loan application.
Frequently asked questions about secured personal loans
A car loan is used specifically to purchase a vehicle. The loan is still secured, but the difference is the loan amount is restricted to buying the vehicle that will be used as security for the loan. A secured personal loan is where you already own the asset, which can be a car or home equity for example, and then you use the loan amount for whatever purpose you need.
The lender is able to sell your asset to recoup its losses. Additionally, your credit score will likely take a negative hit.
This is because you have attached an asset to the loan and the lender is taking on less of a risk by lending you money. Even if you default on the loan, they have a right to the asset you attached to the loan and they can sell the asset to recoup their losses. In exchange for you taking on the risk of attaching the asset to the loan, you get a lower interest rate.
Aliyyah Camp is a writer and personal finance blogger who helps readers compare personal, student, car and business loans. Aliyyah earned a BA in communication from the University of Pennsylvania and is based in New York, where she enjoys movies and running outdoors.
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