What are secured loans and where can you get one?

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Unlike unsecured loans, secured loans are backed by collateral or a valuable asset that you own. (Shutterstock)

If you don’t have the best credit and want to lock in a low interest rate or borrow a large sum of money, a secured loan might be on your radar. Contrary to unsecured personal loansSecured loans require you to pledge an asset like a savings account or a car, which the lender can take if you don’t repay the loan.

Let’s take a closer look at what secured loans are, where you can get them, and some pros and cons to consider.

If you are considering an unsecured personal loan, you can visit Credible to learn more and to see your prequalified rates.

What are secured loans and how do they work?

Also known as secured personal loanA secured loan is secured by collateral or something valuable that you own. It could be a house, a car, a savings account, an investment portfolio, or even a piece of jewelry or a musical instrument. If you default on your loan, the lender may seize your collateral. You can use a collateral loan to almost any goalwhether you need to cover an unexpected expense, pay a medical bill or perform an expensive car repair.

You will come across several types of secured loans, including mortgages and car loans. If you take out a mortgage, for example, you will use your house as collateral. For an auto loan, you would use your vehicle as collateral. Other examples of secured loans include home equity loans or home equity lines of credit (HELOCs), which also use your home as collateral.

Secured loans are less risky for lenders because they have the right to sell your asset if you fail to repay your loan. This can make secured loans easier to obtain than unsecured loans, which pose a higher risk to lenders.

Where can you get a secured loan?

You can get secured loans from a number of financial institutions, such as:

  • Banks – If you already have a checking or savings account with a bank, you might want to start there for a secured loan.
  • Credit Unions – In most cases, you will need to be a member to qualify for a secured loan from a credit union.
  • Online lenders — While most online lenders only offer unsecured loans, some also offer secured loans.
  • Car dealerships — If you are looking for a new or used vehicle, you may be able to get a car loan from a car dealership.
  • Pawn shop – Pawnbrokers are secured by a personal item of value, but they usually come with very high costs.

What credit score do you need for a secured loan?

Each lender has their own requirements for secured loans. While some require good or excellent credit scores, others are more lenient and work with borrowers who have fair credit ratings. If you don’t see the credit score requirements listed on a lender’s site, you can contact the lender to find out.

Comparing rates from multiple lenders can help you find the loan that’s right for you. Credible, it’s easy to compare your prequalified personal loan rates from several lenders.

Lenders who offer secured loans

While some personal lenders only offer unsecured loans, others offer loans that you can secure with collateral. These four credible partner lenders offer secured loans:

Before

  • Loan amounts: $2,000 to $35,000
  • Minimum credit score: 550
  • Acceptable collateral: Auto

LightStream

  • Loan amounts: $5,000 at $100,000
  • Minimum credit score: 660
  • Acceptable collateral: Car, motorcycle

OneMain Financial

  • Loan amounts: $1,500 to $25,000
  • Minimum credit score: Check with the lender
  • Acceptable collateral: Car, Truck, Motorcycle, Boat, RV, Motorhome

Improve

  • Loan amounts: $1,000 to $50,000 ($3,005 minimum in GA; $6,005 minimum in MA)
  • Minimum credit score: 560
  • Acceptable collateral: Auto

The following three lenders are not Credible partners, so you won’t be able to easily compare your rates with them on the Credible platform. But they are also worth considering if you are looking for a secured loan:

First Tech Federal Credit Union

  • Loan amounts: $25,000 to $1,000,000, depending on coverage
  • Minimum credit score: Varies depending on loan amount and collateral
  • Acceptable collateral: Stocks, First Tech stock certificate, First Tech savings account

Federal Naval Credit Union

  • Loan amounts: Equal to the amount of your savings or certificate of deposit
  • Minimum credit score: Check with the lender
  • Acceptable collateral: Navy Federal Savings Account, Navy Federal Certificate of Deposit

Wells Fargo

  • Loan amounts: $3,000 to $250,000, depending on coverage
  • Minimum credit score: Check with the lender
  • Acceptable collateral: Savings account, certificate of deposit, home

How to apply for a secured loan

If you decide to go ahead, you’ll typically follow these steps to apply for a secured loan:

  1. Check your credit score. Since borrowers with the best credit ratings generally qualify for the lowest rates, it’s a good idea to review your credit rating before applying for a collateral loan. This way you will know where you stand and you won’t be surprised.
  2. Pre-qualified. Find a few lenders that allow you to prequalify for a secured loan. Prequalification generally won’t affect your credit score, so you can explore potential offers without affecting your credit.
  3. Compare offers. Compare prequalification offers and review accepted collateral, interest rates, terms and fees for each option.
  4. Take a decision. Determine which offer best suits your budget, needs and preferences. Be sure to choose a lender with collateral requirements that you can meet.
  5. Gather your documents. When you apply for a collateral loan, the lender will ask you for supporting documents to confirm your financial situation. Be prepared to submit pay stubs, tax forms, bank statements, and proof that you have the security you are offering.
  6. Complete a formal application. Depending on the lender, you may be able to apply for the loan online. Check your work before submitting your application to avoid delays. Once you’ve made a formal request, the lender will usually do a credit check, which can temporarily lower your credit score by a few points.
  7. Wait for funds. The type of secured loan and the lender you choose will determine how long it will take to receive the money. Funding time can be one business day or seven or more business days.

Credible makes it easy for you compare personal loan rates from various lenders in minutes, without affecting your credit score.

Advantages and disadvantages of secured loans

Like any other financial product, secured loans have advantages and disadvantages to keep in mind.

Advantages

  • They may be easier to get if you don’t have the best credit. Since you are securing your loan with an asset, secured loans are less risky for lenders. This means you can have one with no credit or with bad credit.
  • They usually offer lower interest rates. Compared to unsecured loans, secured loans often have lower annual percentage rates, or APR. A lower rate can save you hundreds or even thousands of dollars over the life of your loan.
  • They come with higher loan amounts. Lenders have the legal right to take your property if you don’t repay a secured loan. This may make them more willing to provide higher loan amounts, which will depend on the value of your collateral.
  • They may have better conditions. If you want more time to pay off your loan, some types of secured loans come with longer repayment terms than secured loans. For example, a mortgage, which is secured by your home, may have a repayment term of 10, 15, 20 or 30 years.
  • They could help you build or improve your credit. As long as you make your monthly payments on time and in full, a secured loan can help you establish a positive credit history. Just make sure the lender you choose will report your payments to the three major credit bureaus – Equifax, Experian and TransUnion.

The inconvenients

  • The application process can be more complex. Chances are you will have to provide more documents and share more information when applying for a secured loan than you would with an unsecured loan.
  • You are putting your asset at risk. If you default on your loan, the lender can foreclose on your property. This can be risky, especially if you are hiring your car or your home.
  • You need collateral. To take out a collateral loan, you must have something of value. If you don’t have the type of security a lender is looking for, the loan won’t be an option for you.
  • Not all lenders offer secured loans. Almost all lenders offer unsecured loans. But not everyone provides secured loans, so you may need to do some extra research to find the right secured loan for you.
  • You could hurt your credit. While a secured loan can help your credit, it can also hurt it if you don’t make your payments on time or, even worse, if you let it default. Lenders will report any late or missed payments to major credit bureaus, which can stay on your credit report for up to seven years.

Is the secured loan for you?

Although a secured loan may be a good option in some situations, it may not make sense in others. If you’re having trouble qualifying for an unsecured personal loan or need to borrow a large sum of money and you have something of value that you can afford to risk, a secured loan can be a great option. Good choice. Additionally, if you have poor credit or no credit, a secured loan can help you establish or improve your credit history.

On the other hand, if you are not sure that you can repay your loan, a secured loan is risky because you could lose a valuable asset. If you have good credit and don’t want to put a valuable asset on the line, an unsecured loan is probably a better option.

About Scott Conley

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