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What is a Secured Personal Loan?

Need to borrow money? Want to impress your friends with your financial savvy? We have the solution for both: get to know the difference between a secured and unsecured loan.

Personal loans are an outstanding finaicial tool. They’re flexible so you can use them for a variety of needs such as paying off high-interest credit card debt or funding a big purchase.

They also come in two flavors: secured and unsecured. The latter is given to well-qualified borrowers to use as they want (yay, freedom!). Obtaining a secured loan, however, is a little trickier as it requires some kind of collateral.

Are there benefits to using collateral? Why would you choose secured over unsecured? By the end of this article, you’ll be able to answer these questions and drop some knowledge on your friends. When you’re not around, they’ll gossip, “Has Mike turned into a financial wizard?”

And with that, let’s get started, Mike…

Understanding What Is A Secured Personal Loan

A secured personal loan is one in which an asset is necessary. Said asset makes your lender feel more comfortable about letting you borrow money. If you fail to make payments on time, the lender can seize it to repay the debt.

Why use an asset at all? If you have a low credit score, it can boost your appeal as a borrower. But there’s a big benefit to you as well, as you’re likely to get lower interest rates, and pay less for the loan overall. Everyone wins! (Cue sound of cheering crowd.)

What You Can (And Definitely Can’t) Use to Secure a Personal Loan

What can you use to secure the loan? This is the biggest question most people have about these types of loans.

The answer depends on the lender. Some are more willing to allow you to use a diverse assortment of assets than others. However, none of them will let you use your pet rock.

Options for securing a personal loan may include:

  • Your vehicle (as long as you have significant equity in it and don’t have a lein on it)
  • Your savings account
  • A certificate of deposit you own
  • Assets that appraise at a high value, such as art collections or jewelry
  • Recreational vehicles such as watercraft, riding lawn mowers, or motorcycles

Not sure if your asset qualifies for a personal loan? Ask your lender. Remember, they do not take these items from you, and you will not lose them as long as you make on-time payments on the loan.

However, they will put a legal lien on that piece of property. This gives the lender the right to take possession of the asset if you’re unable to pay off the loan. But to be honest, lenders aren’t thrilled about doing this. It’s a hassle for them to have to turn around and sell your asset.

I Have a Fear of Commitment: Should I Consider A Secured Personal Loan?

Secured personal loans are very flexible. You can use them for a wide range of needs. What’s not so flexible is your obligation to repay them.

For this reason, you should never take out a personal loan unless you can be certain you’ll repay it on time.

Some ways to use personal loans include:

  • Consolidating high-interest debt, such as credit cards
  • Paying off medical debt
  • Making a valuable purchase
  • Doing home improvement projects
  • Taking a vacation

If you need to borrow money and you have an asset, a secured loan can be a great option.

Who Qualifies For A Secured Personal Loan?

Like Bigfoot, “fun” diets, and convenient parking in LA, unsecured personal loans are alluring yet elusive for many borrowers.

Because there is less protection for lenders with an unsecured loan, they tend to make these loans available to individuals who have the best credit.

However, secured loans are a bit different. The asset gives the lender a higher level of protection. But—and this is a big but—there are no guarantees. If you have an asset but your credit score is sad, then you may still struggle to qualify. Good credit, a steady income, and the ability to repay the debt will always help your chances.

What To Expect When You’re Expecting… A Secured Personal Loan

Not all secured personal loans are created equal. That’s why it’s important to comparison shop.

When choosing secured personal loans, or any loan, be sure to consider the following:

Interest rates
Secured personal loans tend to have lower interest rates than unsecured loans. This can make them more desirable. If you also qualify for an unsecured personal loan, congrats! You’ve achieved Baller Borrower status. But remember, with great power comes great responsibility: you must compare the interest on the secured and unsecured loans for which you qualify, and see what’s more affordable.

Terms
The length of a secured personal loan will range substantially between lenders. You may be able to work out a plan so that the loan repayment is affordable to you.

Fees
Most secured loans have some closing costs. These costs typically range from one to five percent of the amount borrowed. Many lenders roll these fees into the loan, so you do not have to pay for them out of pocket.

Which Way to The Secured Personal Loans?

When you start your search for a secured personal loan, you’ll quickly realize that everyone and their grandma offers them. Options are always a nice thing, but make sure you read the fine (and not-so-fine) print.

Always look at interest rates, terms, and features before making a buying decision. In a few cases, online lenders may be able to process the funding faster, but they tend to have higher interest rates compared to local lenders. And if we do say so ourselves, your local credit union is an excellent option.

One key benefit to choosing a credit union for a secured personal loan is your ability to qualify. Credit unions treat you more like a neighbor, whereas big financial institutions and online banks are more likely to view you as just another borrower. As a result, they may be more willing to offer personal loans to someone who would not otherwise qualify.

Talk to your local lender about the benefit of a secured loan. Compare other loan products available to you, too.

Getting A Secured Personal Loan

come in handy when you need to borrow funds and want an affordable rate. While you do need some kind of collateral, your lender may be open to using non-traditional types of assets to help secure the loan for you (they want you to be your best borrower self!). Speak to them about each one of your options.

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