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:
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:
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:
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.