Secured personal loans explained

A secured personal loan can be used to pay for just about anything — from a car to a big expense — and they typically have lower rates than unsecured loans. But you risk losing your asset if you default, so consider your finances carefully before you borrow.

How does a secured personal loan work?

A secured personal loan allows you to borrow money by using an asset — like a savings account or car — as collateral. Because of this, lenders may offer larger loan amounts, sometimes up to $100,000. You’ll still need to meet the lender’s income, debt and credit requirements to qualify, but securing a loan with an asset can increase your chance of approval.

There can be a major drawback, however. If you’re unable to repay your loan, your lender may seize your asset and report your default. This means you’re down an asset and your credit score will fall. The extra risk for the borrower is why interest rates tend to be lower, but you should be certain you can repay before pledging any asset as collateral.

Many lenders offer both secured and unsecured loans, so make sure you know the difference when you apply.

What assets can be used as collateral?

Although it varies by lender, these assets are commonly used to secure a personal loan:

• Your vehicle. If you’re buying a new or used car — or if you have a car that is less than two years old — you can generally use it as collateral for a secured loan. For borrowers with bad credit, an auto title loan can be used to secure a short-term loan, but these are much more risky than a standard personal loan.
• Your home. If you own a home, you can draw against the property’s equity to secure your loan. These are commonly used for home renovations and college expenses.
• Your savings. Banks may allow you to use your savings account or a CD as collateral for a loan. And credit unions may allow you to use your share account. You can typically borrow a percentage of the money you have stashed away. But like with all secured loans, you risk losing your savings if you default.
• Your luxury items. 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 can use it to secure a personal loan.

Where can I get a secured personal loan?

When you’re shopping for a secured loan, there are three types of lenders you should look into:

Banks and credit unions

Banks and credit unions frequently offer secured loans to their customers and may even cap the interest far below the nationwide maximum of 36%. But many only accept certain assets — like a savings account with the institution — as collateral. And while they can be used to quickly get cash, they may have stricter requirements than an online lender.

Online lenders

Online lenders don’t offer generic secured loans as frequently as banks and credit unions. However, there are some reputable lenders, including OneMain Financial, that will accept some assets as collateral for a loan. You can often check your APR without affecting your credit, so compare rates and fees to find an online lender that competes with a bank or credit union.

Compare lenders that offer secured personal loans

Pros and cons of a secured personal loan

5 factors to compare between secured personal loans

Use these five factors to help guide you toward a lender that fits your financial needs:

1. Approved assets. 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 this before you apply.
2. Interest rate. Compare the minimum and maximum interest rate against other lenders. Unless you have excellent credit, you’ll want to know how much you can be charged. In some cases, you might find a lender that offers unsecured loans at a better rate — which could mean less risk and less money spent.
3. Loan amount. Find out what loan amounts the lender offers. If it won’t cover the expense you plan on covering, then it won’t be a good fit for you.
4. Loan terms. Generally, loans are available for terms of between one to seven years. If you need a longer loan — or a much shorter one — find a lender that allows you to repay at your speed.
5. Fees. Check upfront fees such as application or origination fees as well as ongoing annual or monthly fees. These will add to the cost of your loan.

Is a secured loan the right option for me?

When it comes to secured personal loans, here are four questions to ask yourself before you borrow:

• Do you have an asset or want to buy one? Lenders will require that you either be looking to buy an asset with your loan or that you already have an asset that meets its criteria. If you don’t, then an unsecured loan may be better.
• Does your asset meet the lender’s requirements? Lenders will have requirements for the 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’re using a savings or investment account, you may need to have a certain amount in the account.
• Do you meet the lender’s requirements? In addition to restricting the asset that can be used, a lender may also require a certain debt-to-income ratio, income or credit score. Check to make sure you and your asset qualify for the loan.
• Can you manage your repayments? If you find yourself unable to repay a secured loan, your lender is able to repossess the asset you offered as a guarantee in addition to charging other fees.

Secured loans can also be a great option if you have bad credit and want to consolidate debt. Most debt consolidation lenders require a credit score above 670 — and that accept poor credit charge high rates and fees. By offsetting some of risk to the lender, securing the loan can help ensure you’re getting a low-enough rate to help you save.

Bottom line

A secured personal loan can help you score a lower interest rate. And if you budget carefully, you won’t have to worry about losing your asset. Just compare your personal loan options to find the lender that best meets your needs.

Frequently asked questions

• What's the difference between a secured personal loan and a car loan?

  A car loan is used specifically to purchase a vehicle — but it doesn't necessarily need to be secured by the car. A secured personal loan is where you already own an asset and you use the loan amount for a large expense or purchase.

• What happens if I default on a secured personal loan?

  The lender is able to sell your asset to recoup its losses.

• Why are interest rates lower on secured personal loans?

  Because you have attached an asset to the loan, the lender is taking on less of a risk by lending you money. Even if you default on the loan, the lender has the right to the asset you attached to the loan. So in exchange for you taking on the risk of attaching the asset to the loan, you will typically receive a lower interest rate.

Written by

Aliyyah Camp

Contributor

Aliyyah Camp is a SEO content strategist and former publisher at Finder, specializing in consumer and business lending. Her writing and analysis has been featured in CentSai, the Dough Roller and the Chicago Tribune. She holds a BA in communication from the University of Pennsylvania. See full bio