If you need a loan, you may wonder if you’d qualify for a secured loan. A secured loan requires the borrower to pledge an asset they own as collateral to the lender. The good news is that a secured loan may be easier to get than an unsecured loan, which doesn’t require collateral. So, let’s dive deeper and see how secured loans work so you can determine if it might make sense for you.
What are secured loans?
Secured loans are backed by collateral. Collateral is an asset you own, such as a house, car, cash in a savings account, boat, fine art, or jewelry. If you fail to repay a secured loan, the lender has the right to seize the collateral. Therefore, you should only get a secured loan if you’re confident you’ll be able to make your payments.
Are secured loans easier to qualify for?
When you put collateral on the line, you become less of a risk for the lender because they know that if you default on your secured loan, they have the legal right to take the asset and sell it to recoup some of their losses. For this reason, because secured loans typically have less stringent credit qualification requirements more borrowers can get approved. If you don’t have the best credit or can’t qualify for other types of loans, assuming the lender considers the asset adequate collateral, a secured loan might be a good solution.
Types of secured loans
The most common secured loans include:
- Personal loan: These are typically collateralized by a car, house, savings account, or other tangible, valuable asset.
- Mortgage: Mortgages are loans collateralized by the house subject to the loan.
- Car loan: This loan type is collateralized by the vehicle being purchased.
- Home equity loan and a home equity line of credit: Each of these different loans are secured by the value of the home’s equity, which is the difference between what is owed on the mortgage and what the home would be worth if it were on the market.
Benefits of secured loans
The most noteworthy benefit of a secured loan is that you may get approved for one despite your credit or financial situation. Here are a few advantages to consider:
- Better rate: Less risk for the lender often means a lower interest rate for the borrower. A lower interest rate can save many dollars over the life of a loan.
- Higher borrowing amount: A secured loan can typically mean the lender is willing to lend more, assuming the value of the pledged asset is adequate. If you have a significant expense requiring tens of thousands of dollars, a secured loan may be the best way to meet that need.
- Many options: Many lenders offer secured personal loans, home equity loans, and home equity line of credit loans. You should shop around, compare options, and home in on the solution for your unique budget and needs.
Since secured loans are tied to collateral and lenders can seize it if the borrower defaults, they’re typically easier to qualify for than other types of loans. In addition, assuming the asset value is adequate, they tend to come with lower rates and higher borrowing amounts. However, they come with the risk that if you default on the loan you lose the asset. That said, secured loans are available from a variety of lenders, allowing you more choice if you’re considering one for your situation.