Definition and Example of a Secured Loan
A secured loan is one where the lender requires that you pledge collateral, such as a piece of real property, another asset, or money, to get funding. Examples of secured loans include:
MortgagesHome equity loansCar-title loansAuto loans
You can find secured loans with just about any lender that provides loans to consumers. Most lenders offer traditional secured loans, such as mortgages and auto loans, but there are alternatives. Others offer secured loans where you can use your savings or CD account as collateral.
How a Secured Loan Works
Secured or not, loans allow you to borrow money to buy something now. You can then repay the money later, usually on a monthly basis. Most secured loans require a credit check. Lenders will determine your interest rate based on your credit history and your credit score. Interest rates for secured loans tend to be lower than those for unsecured loans, because you’re using an asset to secure your loan. You’ll get the money if your loan is approved, but the lender will place a lien on your collateral. The lien gives the lender a legal right to repossess your property should you fall behind on payments and go into default on the loan. The lender can sell the asset it seizes to try to recoup the money you borrowed. This calculator can help you understand what your monthly payment will be so you can avoid offers that overextend your budget and could cause you to risk default: Even if your lender resells your assets, the money from the sale might not cover the full amount you owe on the loan. The lender could pursue you in court for the remaining balance in that case.
Secured Loans vs. Unsecured Loans
Secured loans require collateral. Unsecured loans don’t require that you put up an asset to secure the loan. Lenders instead give out these loans based on your creditworthiness. Secured and unsecured loans have a few key differences. Lenders can process applications for secured loans such as car loans within a few hours. But mortgage and home loan approvals can take a month or two to finalize. Funding amounts can vary by the type of loan you’re getting as well.
Alternatives to Secured Loans
Secured loan alternatives will be high-cost propositions in most cases. Payday loans offer fast funding that’s borrowed against your next paycheck, but your annual percentage rate could be has high as 400%. Secured credit cards might catch your eye, but they might not be a great choice, because they require a cash deposit to open your account. The cash is used to pay off your balance if you default. You might want to look for an unsecured credit card for bad credit instead, although the interest rate might be higher than average, but you can avoid paying interest if you pay off your credit card balance each month.
