What is a secured loan?

A secured loan is a type of loan where a borrower uses collateral to back or “secure” the loan. If the borrower can’t repay the secured loan, the lender can take that collateral to help cover the unpaid debt. 

Find out more about how secured loans work, what can be used as collateral, and some possible pros and cons of secured loans.

What you’ll learn:

• Secured loans are backed by the borrower’s assets, called collateral. 
• Collateral may include physical assets, such as a house or car, and liquid assets, such as cash.
• If the borrower defaults on a secured loan, the lender can seize the collateral to cover their losses. 
• Because of the collateral, secured loans may have lower interest rates, higher loan amounts and be easier to qualify for compared to unsecured loans. 

A secured loan is a type of loan that’s backed by the borrower’s collateral. That collateral might be a physical asset, such as a car or house. Or it may be liquid assets, such as investments or cash. With a mortgage or car loan, for example, the loan is typically secured by the house or car you bought with it. 

When a borrower takes out a secured loan, they agree to let the lender place a lien on their collateral. Then, if the borrower defaults on their secured loan, the lender can take the collateral to cover the unpaid debt. Defaulting on a loan means failing to pay it back as agreed. 

Because they’re backed by collateral, secured loans are generally considered less risky by lenders. Because of this, they may be easier to qualify for than unsecured loans. Some secured loans may also have higher loan amounts and lower interest rates.

Secured loans can be two types of credit: 

• Installment loans: Most secured loans are installment loans. Installment loans are closed-ended loans where the borrower receives a lump sum and pays it back in regular monthly payments. Mortgages and car loans are two common examples of secured installment loans. 
• Revolving credit: Some secured loans, such as secured credit cards and home equity lines of credit (HELOCs), are revolving credit. This means that the account is open-ended and can be used and paid down repeatedly as long as it stays open and in good standing. 

The main difference between secured and unsecured loans is whether they require collateral. 

Secured loans require the borrower to back the loan with an asset, like a car, house or cash. Unsecured loans don’t require collateral. 

Since unsecured loans aren’t backed by collateral, they typically have stricter eligibility requirements, like higher credit scores, than secured loans. 

Here are a few common types of secured loans:

• Mortgages
• Auto loans
• Secured personal loans 
• Secured business loans 
• HELOCs
• Home equity loans
• Secured credit cards
• Car title loans

How each secured loan works can vary by lender, loan type and more. But what all secured loans have in common is that they require some kind of collateral.

Before you apply for any kind of loan, it’s important to think about the potential pros and cons. Here are a few to consider when it comes to secured loans:

Secured loans can have some notable benefits. But like all debt, those benefits depend on whether you use the loan responsibly and the terms of your specific loan. 

Here are a few potential advantages of secured loans: 

• Lower interest rates: Lenders may offer lower interest rates on secured loans than unsecured. But that’s not always the case. Make sure to read all the loan terms and conditions carefully before applying. 
• Higher loan amounts: Secured loans are often used to fund a large purchase, such as a house or car, and may have higher borrowing limits compared to unsecured loans.
• Less stringent eligibility requirements: Secured loans may be easier to qualify for than unsecured loans. This means that you may be able to get a secured loan with a lower credit score—as long as you can secure the loan with adequate collateral and meet other requirements. 
• Opportunity to build credit: Secured loans may offer a chance to build or rebuild credit. Keep in mind that you can only build good credit with responsible use, which includes always paying on time. 

One potential downside of a secured loan is losing your collateral if you default on the loan. But if you pay back the loan as agreed, a secured loan could be an important tool that helps you reach your financial goals, like owning a home or building credit for the future. And remember, before you take out any kind of debt, make sure you research your options and understand all the terms. 

Here are some frequently asked questions about secured loans: 

Secured loans require the borrower to back the loan with collateral, like a car, home, investments or cash. Mortgages and car loans are two common types of secured installment loans. Secured credit cards are an example of a secured revolving credit account. 

Secured credit cards can be tools for building or establishing credit. They require a one-time security deposit to open an account. And with responsible use, cardholders may be able to earn their security deposit back and upgrade to an unsecured credit card. 

If you want to explore some options, you can compare secured cards and check for pre-approved card offers before you apply. Pre-approval is quick and won’t hurt your credit scores.