Secured Loan

Secured loan summary:

A secured loan is a loan that's backed by collateral.
Secured loans generally offer lower interest rates than loans without collateral.
You might be required to have insurance on whatever you’re using as collateral.

Secured Loan Definition and Meaning

A secured loan is a loan guaranteed by collateral. Collateral is something valuable that you pledge as a guarantee that you’ll repay the loan. Collateral provides a financial safety net for the lender. If you can’t pay back the loan, the lender could sell your collateral to recover the money you owe.

Because of the financial safety net, secured loans typically cost less than similar unsecured loans that have no collateral.

Types of Secured Loans

The following table breaks down some common types of secured loans, along with their use and what kind of collateral they involve.

Loan Type	Use	Collateral
Mortgage	Buy a home	Home
Auto loan	Buy a car	Car
Home equity loans or home equity lines of credit (HELOCs)	Any purpose	Home
Pawn shop loans	Any purpose	Varies: jewelry, collectibles, etc.
Business loans	Expand or improve a business	Business equipment or buildings

Secured Loans: A Comprehensive Breakdown

Getting a secured loan generally begins with filing an application. You'll have to provide details about yourself, your income, and your credit history as well as the property you plan to pledge as collateral. The lender will review this application to determine whether you qualify.

Depending on the type of loan, you may need to have insurance on the collateral. For example, you need homeowners insurance to get a mortgage. This is to protect the lender's investment in case something happens to the home.

If you're approved, the lender gives you the loan funds and you begin making payments. If you have a fixed-rate loan, payments remain the same for the life of the loan. Adjustable-rate loan payments could change over time. Your loan agreement should explain what type of interest rate you have and when it could change, if ever.

If you fall behind on your secured loan payments, communicate with the lender before they move to take possession of your collateral.

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Secured Loan FAQs

Why are interest rates higher for unsecured loans?

Secured loans are safer for lenders because if the borrower defaults, the lender can simply take the collateral and sell it to recoup the loan balance.

The opposite of this is the unsecured loan. There is no property and the lender might have to sue to get repaid. In addition, the default rate is higher for unsecured debt. That means there is a greater chance that the borrower will not pay the loan back. Lenders must charge more to make up for the added risk.

What is the difference between secured and unsecured debt?

Secured debt is guaranteed by something valuable (collateral) that you agree to give up if you can’t repay the debt. Car loans and mortgages are secured debts. If you default on the loan, the lender could sell the collateral to get the money you owe.

Unsecured debt is a loan that you qualify for based on your creditworthiness. The risk to the lender is that if you don’t repay the debt, the lender is stuck with the loss. That’s why unsecured loans tend to cost more than secured loans.

How hard is it to get a secured loan?

Secured loans are typically easier to qualify for than unsecured loans because collateral lowers the risk for lenders. That said, lenders still look at your income and credit history, and each will have its own rules regarding who qualifies.