There may come a time when you may not qualify for regular, unsecured personal loans. That’s when you’ll most likely turn to secured ones.
Secured loans, sometimes called collateral loans, are backed by a borrower’s asset. This acts as collateral that the lender can claim if you default on your loan.
Having collateral assets in the mix makes secured loans a safer bet for the lender. Which, in turn, can have a few benefits for you, the borrower.
Benefits (and barriers) to getting a secured loan
The first major benefit of a secured loan is easier approval.
Collateral loans already have a way for lenders to assure they’ll get their money back. Therefore, credit and lending requirements are usually more relaxed on a secured personal loan.
This makes it possible to get a personal loan with bad credit. So long as you’re willing to offer up some collateral.
Another major benefit of secured loans is lower personal loan rates. The lower risk associated with a secured loan often results in a lower interest rate than an unsecured personal loan would carry.
A lower interest rate offers big savings in the long-run. Not only with lower monthly payments, but also less total interest paid over the life of the loan.
However, the offset of these secured loan pros is that a borrower will need to use an asset as collateral. This creates an initial barrier to borrowing because a borrower has to own something that can be used as collateral.
So what can actually be used as collateral for a secured personal loan?
Here are some assets you might have that could qualify you to borrow with collateral loans.
1. House or home equity collateral loans
A home or real estate property is one of the most common forms of collateral for secured loans.
For example, mortgages are set up as loans secured by the property. That’s why a bank can foreclose on a homeowner who has defaulted on a mortgage.
A mortgage isn’t the only secured loan that can use a home as collateral, however.
A second mortgage can be taken out on top of a first mortgage as a way to borrow against a home’s equity. And a home equity loan is a type of personal loan secured, as indicated in its name, by the home’s equity.
Of course, your home is also one of your most important assets. And you should fiercely protect it.
With collateral loans secured by your home, it’s especially important to borrow wisely. That’s why you should make sure your payments will be affordable. If you can’t make payments, you risk losing the equity you’ve built up. Or even your home.
The Federal Trade Commission (FTC) even recommends that you shop around for the best APRs and loan terms prior to getting a home equity loan.
Also, watch out for signs of predatory lending around home equity loans. These include lenders using high-pressure sales tactics, failing to disclose details, or refusing to let you review or keep copies of the forms you’ve signed.
2. Secured car loans
Another common form of secured loan collateral is a car or other vehicle. Most auto loans used to purchase a car are secured by the vehicle’s value, often estimated by Kelley Blue Book.
But if you own a car, vehicle, or even a boat, you can often use that as collateral for a secured personal loan or auto equity loan.
Just make sure you are getting a secured installment loan from a reputable lender. Many major banks and credit unions offer car equity loans or similarly secured car loans at affordable terms.
But try and avoid car title loans. These usually have high APRs (think 100% or higher according to the FTC) and short repayment periods of 15 to 30 days. The combination of high fees and short repayment periods make these a very high-cost way to borrow.
3. Your investments as collateral for a loan
Stocks or other investments can also be used to get a secured personal loan.
Loans that use investments as collateral are often called securities-based loans or stock-based loans. These are often offered by investment brokerages or private banks to clients who already have investments with these companies.
These are set up similarly to other collateral loans. The borrower’s stock holdings or other investments are used as collateral against the loan. Usually, a lender will extend credit up to the full amount of the investment portfolio’s value.
However, the value of a portfolio can fluctuate with the market. This could cause problems with this type of loan.
For example, if the value of the investments dip below what you owe, your lender could call the loan in and demand extra cash to make up the difference.
Therefore, make sure you understand the terms of a security-based loan to protect your investments.
Lastly, not all investments can be used for securities-based loans. Retirement accounts like 401ks and IRAS, for example, usually can’t be used as collateral for secured loans.
4. Savings-secured loans
Some banks will also offer savings-secured or certificate-secured loans. These are typically offered by banks and credit unions to existing customers.
Savings-secured loans allow borrowers to keep their liquid cash in a deposit account, usually a savings account or certificate of deposit, while also getting a loan to fund something they need.
The best part is borrowers can usually earn interest on their deposits while using them as collateral for a secured loan.
However, the deposit will usually accrue interest at a much lower rate than the borrower will pay on the loan. So it might actually be more advantageous to simply pull out your cash to pay for expenses, rather than borrow.
On the other hand, a savings-secured loan can be a smart tool to build credit.
It’s also usually much easier to qualify for these loans. So even those with bad credit can get these personal loans. As your repay it responsibly it can help repair your credit and give you a better credit mix.
5. Secure a loan with future paychecks
It’s also possible to use your future income to secure a cash-advance loan. With these types of loans, you borrow money now with the agreement that you’ll pay it back when you get a paycheck.
Don’t confuse legitimate cash-advance loans with payday loans, however. The latter often carries high APRs and employs harmful lending practices that make them a very costly way to borrow.
Many lenders, banks, and credit unions offer legitimate cash-advance or salary-advance loan options. Yet, even with a legitimate lender, repayment is usually required very quickly — upon receipt of your next paycheck.
However, this could be a decent option for certain situations. Like funding a move to start a new job or filling in gaps irregular paychecks.
Think Twice About Using Collateral for a Secured Loan
If you have any of the above assets, you could use it to get a secured personal loan.
But remember, borrowing with collateral loans will require extra diligence on your part to ensure loans are affordable. And, that you never miss a payment.
Also, keep in mind that some kinds of secured loans are riskier than others. So make sure you shop around, do your research, and responsibly repay secured loans to avoid losing your collateral asset.
Interested in a personal loan?Here are the top personal loan lenders of 2017!
|Lender||Rates (APR)||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Important Disclosures for Citizens Bank.
Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi's underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Finance Lender Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)
Citizens Bank Disclosures
Personal Loan Rate Disclosure: Variable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of January 1, 2017, the one-month LIBOR rate is 0.76%. Variable interest rates range from 5.75% - 15.50% (5.75% - 15.50% APR) and will fluctuate over the term of your loan with changes in the LIBOR rate, and will vary based on applicable terms and presence of a co-applicant. Fixed interest rates range from 5.99% - 16.24% (5.99% - 16.24% APR) based on applicable terms and presence of a co-applicant. Lowest rates shown are for eligible applicants, require a 3-year repayment term(see examples), and include Loyalty1 and Automatic Payment 2 discounts of 0.25 percentage points each, as outlined in the Loyalty Discount1 and Automatic Payment2 Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
|4.79% - 14.24%1||$5,000 - $100,000||Visit SoFi|
|5.75% - 16.24%2||$5,000 - $50,000||Visit Citizens|
|5.67% - 29.99%||$1,000 - $50,000||Visit Upstart|
|8.00% - 25.00%||$5,000 - $35,000||Visit Payoff|
|9.95% - 36.00%||$1,000 - $35,000||Visit Avant|
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