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Secured Personal Loans: Defined and Explained

Secured Personal Loans: Defined & Explained
Kim Franke-Folstad
Kim Franke-FolstadUpdated December 22, 2021
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Though secured personal loans, which are backed by collateral, aren’t as common as unsecured personal loans, they can be a good fit for some borrowers. Because they generally pose less risk to the lender, a secured personal loan may be easier for an applicant to be approved for than an unsecured loan, and the loan amount could be larger. Another plus: The annual percentage rate (APR) might be lower than the borrower could get with a similar unsecured loan.That can make a secured personal loan an option worth considering, whether your goal is to consolidate debt, pay off an unexpected expense, or make a large purchase.

Secured Personal Loans Defined

A personal loan is “secured” when a borrower agrees to back the loan with a tangible asset they own, such as a valuable collection, a car, real estate, a certificate of deposit or savings account. When the borrower pays off the loan, the lender no longer has any claim to the asset. But if the borrower defaults, the lender has a right to take the collateral as payment for the loan.

How Does a Secured Personal Loan Work?

If you have an auto loan or a mortgage, you probably already have some idea of how secured loans work.If you don’t make your car payments, for example, the lender may repossess your car. Or if you fail to make your house payments, the lender could foreclose. The asset you’re buying (the car or the home in these examples) serves as collateral for the loan.A personal secured loan is different in that the item you’ll use as collateral is something you already own. And in exchange for your promise that you’ll give up that asset if you should default on your loan, the lender will provide you with a lump sum of money to be repaid with interest over a fixed term. Collateral is the main difference, when considering secured vs. unsecured loans, in personal loans. When you finish repaying a secured loan, the lender will no longer have any claim to the item you put up as collateral.Because the risk for lenders can be lower with a secured loan, it may be easier for someone with poor credit or whose credit history is not robust to get this type of financing. Interest rates offered on secured personal loans also may be more favorable than those on unsecured loans, making repayment potentially more manageable. Lenders often allow applicants to see an estimated rate online without it affecting their credit, so you may want to compare rates before deciding which is best for you, a secured or unsecured personal loan.

What Can Be Used as Collateral for a Secured Personal Loan?

Collateral requirements for a secured personal loan may vary by lender, but it’s typical for a lender to look for an asset that is easy to liquidate and valued at close to the same amount as you want to borrow. Options that may be available include: 

Your Vehicle

If you have a car, truck, RV, boat, motorcycle or other vehicle that’s fully paid for — or in which you have a large amount of equity — you may be able to use it as collateral for a secured personal loan. Here are some things to consider:
  • Expect to be asked to show proof of ownership of the vehicle and the vehicle’s value. You also may have to verify that the vehicle has appropriate insurance coverage in case it becomes damaged while you’re paying off the loan.  
  • Equity is the difference between the current market value of the vehicle (not what you paid for it) and what you still owe. So, for example, if you owe $1,500 on a car that’s valued at $10,000, you have $8,500 in positive equity. You may be able to borrow that amount, even if you’re still making payments.
  • If you default on a secured personal loan, you could lose the vehicle you’re using as collateral. 

Your Savings

If you have enough money in a savings account, you might choose to just use that cash instead of taking on a loan with interest payments. But if you’ve set aside that money specifically for some mid- or long-term financial goal — and you don’t expect to use it any time soon — you may consider using the account funds as collateral. Just be aware that the lender may restrict your access to the money until you’ve repaid your loan. An alternative collateral option might be a CD, for which you would likely incur an early withdrawal penalty anyway. 

Investments

You may be able to use investments such as stock holdings or mutual funds to secure a personal loan. However, available lenders likely will be limited. And if the market dips and your portfolio loses value, you may be asked to make up the difference to maintain security on the loan. It’s also important to note that the securities in your retirement accounts probably won’t be allowed as collateral. 

Life Insurance

If you have a whole or permanent life insurance policy with some accrued cash value, a lender may consider that as a tangible asset. But again, it’s important to look at how the policy fits into your overall financial plans (for yourself and others) before you put it at risk by using it as collateral. 

Precious Metals, Art, or Jewelry

Other items of value that could be used as collateral include precious metals, high-end collectibles, a work of art or art collection, or a piece of jewelry or jewelry collection. These items would have to be insured and they likely would have to be appraised regularly, as the value may fluctuate from year to year. You may be asked to provide photos, valuation receipts, and other relevant information.

Pros and Cons of Secured Personal Loans

For some borrowers, a secured loan may be a good way (or even the only way) to get the cash they need. But, as with any financial decision, it’s important to have a clear idea of the benefits and risks. 

Pros

The big pro, of course, is that if you have the right kind of collateral to back up your promise to repay the loan, it could help make up for so-so or even bad credit. If a borrower can lower a lender’s risk by providing collateral, the lender may be willing to offer a bad credit personal loan it otherwise wouldn’t, or a larger loan amount, or a better interest rate.
  • Less risk for lenders may make it easier for applicants to be approved.
  • Lenders may offer lower APR than on an unsecured loan.
  • There is a potential for a larger loan amount than with an unsecured loan.
  • May be a good option for borrowers who are building their credit.

Cons

The major downside to a secured loan is that if you can’t or don’t make your payments, you could lose the asset you pledged as collateral. You may also have to verify the value of your collateral. For example, you may have to have the item appraised (which could delay getting the loan approval), and the lender might ask you to purchase additional insurance on the item.
  • More risk for borrower (potential loss of collateral).
  • Loan applications may take longer to process.
  • Lenders may require assets to be insured or have additional insurance.
  • There may be fewer lending options than for unsecured loans.

Some Secured Personal Loan Lenders

Secured personal loan terms and requirements can vary from one lender to the next. Here’s a look at what some lenders are currently offering.
LenderEstimated APRLoan Amount RangeMin. Credit Score
Avant9.95% to 35.99%$2,000 to $35,000550
First Tech Federal Credit UnionCheck with lender (rates based on collateral)$500 to $1 million (based on collateral)Check with lender (must be First Tech customer)
Lightstream2.49% to 19.99%$5,000 to $100,000660
Mariner FinanceCheck with lender$1,000 to $25,000Check with lender
Navy Federal Credit UnionCheck with lenderBased on NFCU CD or savings accountCheck with lender
OneMain FinancialCheck with lender$1,500 to $25,000Check with lender (loan secured with vehicle)
OportunUp to 36%$300 to $10,000Check with lender (loan secured with vehicle)
Regions BankCheck with lenderAs low as $250; maximum based on savings, CD, money market account)Check with lender (must have Regions savings account)
Upgrade5.94% to 35.97%$1,000 to $50,000560 (loan secured with vehicle)

What Can Happen If You Default on a Personal Loan?

Defaulting is the worst-case scenario for a borrower with a secured loan.The reason why collateral is used is so the lender can seize the collateral asset and sell it to recoup any money owed if the borrower doesn’t make payments according to the loan agreement. Some lenders may allow borrowers to set up payment arrangements with them to get back on track. And the trouble doesn’t necessarily end there. If the balance on the loan is more than the lender can get for the asset, the borrower may still be responsible for the remaining loan amount. Also, the failure to pay could stay on the borrower’s credit report for up to seven years. 

Secured Personal Loan Alternatives

If the drawbacks of secured personal loans are cause for concern — or if you don’t have something to offer as collateral — there are other borrowing options you might want to consider, including:

Unsecured Personal Loan

Unsecured personal loans are similar to secured personal loans in that the borrower receives a lump sum of money and repays that money, with interest, in fixed installments. But an unsecured loan isn’t backed by collateral. Instead, approval is based on creditworthiness and the lender’s assessment of the borrower’s ability to repay the loan. Applicants who have a good credit score and a low debt-to-income ratio (DTI) can typically expect to receive favorable loan terms. An applicant whose credit score or DTI isn’t as strong may still be approved for an unsecured loan, but the interest rate may be higher or the loan amount lower. And that might make a secured loan the better choice. (DTI is calculated by dividing monthly debt payments by gross monthly income.) If you qualify for both a secured personal loan and an unsecured personal loan, and you’re trying to decide between the two, there are a few important differences you may want to keep in mind. Here’s a quick breakdown:
Secured Personal LoanUnsecured Personal Loan
Approval based on credit history and DTI — but with collateral, requirements may be lowerApproval based on credit history and DTI — good credit can mean better loan terms
Interest rates typically lower because more risk is on the borrowerInterest rates typically determined by borrower’s creditworthiness

Credit Cards

Depending on what you plan to use the borrowed money for, you may be able to use a credit card you already have. Of course, you’ll have to have adequate available balance on the credit card to cover the purchase. And the credit card’s interest rate may be higher than the interest on a secured loan, especially if you use the card to get a cash advance. Though using a credit card can be a convenient option, it’s important to factor in the long-term consequences. 

Family or Friend Loan

You might consider borrowing the money you need from a family member or friend if you feel confident you can repay the loan and that it wouldn’t strain your relationship. To protect everyone involved, you may want to draw up and sign a simple agreement that documents the amount borrowed and the repayment terms. Downloadable loan agreement forms are available online.

Finding a Cosigner

If you can find a willing friend or family member who has better credit than you, asking that person to be a cosigner might help you qualify for a loan or get better terms. But it’s important that the potential cosigner is aware that you’re looking for more than a character reference. If a borrower defaults, the cosigner can be held responsible for paying the loan. And any late or missed payments can impact a cosigner’s credit score.

The Takeaway

A secured personal loan can be a good alternative if you have trouble qualifying for an unsecured loan or if backing the loan with collateral could get you a larger loan amount or a lower interest rate. But because the lender could seize your collateral if you default, a secured loan can be riskier than an unsecured loan.Before you submit a personal loan application, it can be helpful to compare multiple lenders to find the best terms possible. That way you can better set yourself up for success — whether the personal loan benefits you receive is from a secured or unsecured personal loan.Ready to find your personal loan? Lantern by SoFi can help you compare lenders and rates.
Photo credit: iStock/fizkes
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About the Author

Kim Franke-Folstad

Kim Franke-Folstad

Kim Franke-Folstad is an award-winning journalist with 30 years of experience writing and editing for newspapers, magazines and websites. Her work for SoFi covers a range of topics related to personal finance, including budgeting, saving, borrowing, and investing.
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