Personal Loans

Secured Loans: What You Need to Know

If you don’t have the creditworthiness to qualify for an unsecured loan, you may consider applying for a secured loan, which is backed by collateral to protect the lender. There are pros and cons to using secured loans, so if you want to take advantage, you should understand your options.

What are secured loans?

Secured loans are backed by assets you own, such as cars, homes or savings accounts, which the lender can take the asset if you don’t pay as promised. Meanwhile, unsecured loans don’t require collateral, so borrower qualifications are mainly based on credit history, income and debt obligations.

The concept of a secured loan is simple: When a bank lends money, there’s risk that the borrower won’t be able to repay the loan. Lenders take on less risk when securing a loan with collateral. If the borrower defaults on the loan, the lender can put a lien on the collateral or seize it to pay off the balance. That’s why secured loans often have lower interest rates than unsecured loans.

Types of secured loans

Here are some common secured loan examples, so you can consider whether they are a good fit for you.

  • Mortgage: A mortgage is backed by your home. If you miss a payment, the bank could start the foreclosure process to take possession of the property.
  • Home equity loan or home equity line of credit (HELOC): These allow you to borrow money using your home’s equity as collateral. If you don’t pay, you risk losing your home and the equity you’ve built.
  • Auto loan: An auto loan is secured by the vehicle you buy. The bank can repossess the vehicle to recoup its losses on a defaulted loan.
  • Auto title loan: An auto title loan is secured by your car title. The lender loans you money and keeps your title until the loan is repaid.
  • Secured credit card: A secured credit card requires a cash deposit — generally ranging from $50 to $300 — that acts as both the collateral and the credit limit. The more you pledge as collateral, the higher your credit limit. For people with no credit history, this can be a good way to build credit.
  • Secured personal loan: A secured personal loan can be backed by a savings account or car title, among other things. A secured personal loan allows you to use funds for just about anything, from home improvement projects to debt consolidation. If the collateral is your savings account, for example, the lender places a hold on the funds. The money remains in your account — and earns interest — but the lender can take it if you don’t pay your loan as agreed.
  • Pawn shop loan: With a pawn shop loan, you leave a valuable item with a shop, accept a lump sum of money and agree to either repay the loan or part with the collateral. If you don’t repay the loan, the pawn shop could keep the item and sell it.

On the other end, a student loan is a common example of an unsecured loan, and many credit cards and personal loans are also unsecured. When you apply for these, the lender largely bases its decision on your creditworthiness.

What can be used as collateral for a secured loan?

When determining the best collateral loan for you, consider what kind of asset you’d be willing to part with if you can’t repay the loan:

  • Real estate/property (homes, home equity)
  • Land (raw or unimproved land can be risky, so you may have trouble finding a lender)
  • Vehicles (cars, trucks, SUVs, recreational vehicles, motorcycles, boats, all-terrain vehicles)
  • Bank accounts (savings accounts, certificates of deposit, money market accounts)
  • Investments (your portfolio)
  • Valuables (jewelry, electronics)
  • Life insurance

When to consider a secured loan

A secured loan can be a good option if you have something of value that you’re comfortable using as collateral. In return, you can typically get a lower interest rate or a larger loan amount compared to an unsecured loan. It can also be good for people who don’t have a strong credit history or enough income to qualify for an unsecured loan. Using a secured loan to build credit can help you qualify for better terms the next time you need to borrow money.

There is a downside, though. If you don’t make timely payments on a secured loan, your credit score can suffer and the lender may take the collateral. Depending on what you’ve pledged, you could end up losing a reliable form of transportation, your home or your savings.

Take note: Before signing for the loan, take a look at your finances and read through the loan terms. Make sure you can afford the monthly payment and that you understand when your lender can take the collateral — and the process it must follow to seize your assets.

Where to get secured personal loans

You can find secured personal loans at banks, credit unions and online lenders. But not all secured loans are the same — every lender offers different loan terms and uses a different method of evaluating your credit profile, income and debt obligations.

To find your best rate, shop around and compare interest rates, collateral requirements and repayment terms. Loan terms can also vary based on where you apply.

Banks

Banks may offer certain perks for existing customers, such as waived origination fees and interest rate discounts. Many of the nation’s large banks offer various secured loans, including mortgages, auto loans, secured credit cards and home equity loans and HELOCs. Some big banks have discontinued secured personal loans, though Wells Fargo and TD Bank do still offer them.

When you shop for a secured personal loan, interest rates typically depend on the loan term and loan amount. Based on Wells Fargo’s rate and payment calculator on May 29, 2020, a secured loan from the bank for $10,000 with a four-year term may come with a 6.87% APR. However, with an unsecured personal loan, Wells Fargo will also consider creditworthiness. Using that same calculator, we found a borrower with excellent credit (760 and above) can expect a higher APR on the same loan amount, ranging from about 7.74% to 10.74%. And if you have poor credit (620 and below), the APR jumps to 21.49%.

If you can’t find a secured personal loan at a national bank, check at a community bank. Some of these institutions offer a mix of unsecured and secured loan options.

Credit unions

Federal credit unions set an APR cap of 18% on most of their loans, which can be a major draw if you can’t find lower rates elsewhere. These financial institutions usually offer secured loans such as mortgages, secured personal loans, auto loans and secured credit cards — generally with lower APRs when compared to the same products at banks.

Secured personal loans at credit unions are sometimes called savings secured loans, share secure loans or CD-secured loans.

Typically you’ll have to join the credit union to apply for these products, which adds a step to the process — and can be a roadblock in some cases. Some credit unions have strict membership requirements, while others are more flexible, and could allow you to join if you live in a certain area or make a small donation.

Online lenders

Online lenders can be convenient because the entire process — shopping around and comparing rates, applying for the loan and receiving the funds — typically takes place online. Most online lenders even offer prequalification, which lets you view potential loan terms without dinging your credit.

You can apply for most types of secured debt online, including mortgages, auto loans, secured credit cards and secured personal loans. A OneMain Financial secured loan, for example, has APRs ranging from 18.00% to 35.99%. OneMain notes that loans secured by a vehicle tend to come with lower interest rates than their unsecured counterparts.

An online lender can be a good option if you won’t need in-person help at a brick-and-mortar location or access to an ATM network. However, you’ll need to check whether the lender can offer loans in your state.

Are there secured loans for bad credit?

Some lenders are willing to work with people who have lower credit scores but can show an ability to repay the loan. Though secured personal loans for bad credit may come with lower loan amounts or a higher APR, qualification requirements are more flexible.

It can be hard to cover your bills after a layoff, medical emergency or other unplanned expense, especially if your credit needs work. Secured loans for bad credit may help you weather these financial emergencies. When checking your loan offers, compare loan amounts, loan lengths and APRs. These loans generally have a maximum of 36%.

If you can’t find a secured personal loan for bad credit with good loan terms, you still have a few more options:

  • Secured credit cards generally come with lower APRs, though you can avoid interest by paying off your balance in full each month if you’re financially able to do so. The average secured credit card APR was 21.51% in April, while the average APR among all new credit card offers was 19.4%. You’ll have to provide a cash deposit, though the issuer may refund the deposit after you demonstrate responsible credit use for several months.
  • Balance transfer credit cards could help you restructure some of your debt. With this type of card, you can move your balances to one card, ideally one with a lower interest rate. This can reduce your monthly payments and help you save money on interest. Look for a balance transfer card with an extended intro 0% APR, which typically lasts for 12 to 21 months. As long as you pay off the balance during the intro period, you won’t owe interest. If you don’t, you’ll owe interest on the unpaid portion of the balance transfer.

Secured loans: Pros and cons

Pros Cons
  • Lower interest rates because they’re less risky for lender
  • Longer terms on some types of secured loans, such as mortgages and auto loans
  • Build credit by making on-time payments on loan (can help borrowers qualify for other loans in future)
  • Lose collateral if can’t make payments
  • Damage credit when lender reports delinquent account to credit bureaus

FAQ: Secured loans

What should you do if you default on a secured loan?

Contact your lender immediately. Borrowers in default in certain states have a “right to cure,” which is like a second chance, so check your state laws. Here’s how it works: Once in default, the lender must give you a certain period — such as 21 days — to catch up on missed payments and late fees. If this doesn’t apply to you, contact your lender anyway; it may be willing to work with you if you can pay the delinquent balance.

Do lenders need to notify you when they’re seizing your collateral?

It depends on the state in which you live, the terms of your loan, the type of collateral and the lender — check your state laws and your contract. If you don’t respond to the lender’s right-to-cure notice, a lender can usually start repossession right away. With some types of collateral, such as a home, the lender must file a court order to seize your asset.

Can a lender seek additional money if the repossessed asset doesn’t cover the money owed?

Typically, yes — again, check your state laws and your contract.

The lender usually sells your collateral and applies the sale price to the loan balance, minus any expenses. In some states, you’re on the hook for the remaining debt — the deficiency balance —  if the sale price doesn’t cover the entire balance owed.

Is transferring unsecured debt to secured debt a good idea?

That’s up to you. Although you may get better loan terms when transferring unsecured debt to secured debt, remember that your collateral is at risk.

 

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