From a new car to your first home, some things in life require you to consider a secured loan. This type of loan is collateralized by an asset that could be liquidated to offset the principal in the event of default. Banks and other financial institutions provide large sums of money for a purchase, and in turn, will have a legal right to the asset purchased until the loan is paid off.
Here’s a look at the different types of secured loans, who they may be good for and what you should consider before taking one out.
Common types of secured loans
You can get a secured loan for various reasons. Thus, you have the option to borrow using loans such as:
- Auto, boat and RV loans: Secured loans backed by a vehicle are fairly common. The financial institution — whether it be the one chosen by the purchaser or the dealer — provides a sum of money to cover the cost for a vehicle. The length of the loan and the interest rate vary based on multiple factors such as credit history, the amount borrowed and any incentives available from the dealer or bank at the time of purchase. The financial institution then will claim the title of the vehicle until the loan is paid off by the borrower who purchased the vehicle.
- Mortgages: Mortgages are loans supplied by a financial institution to purchase a home. The terms and interest rate will vary based on multiple factors. The financial institution has a legal right to the home until the mortgage is repaid in full.
- Home equity loan: A home equity loan allows a person to borrow on the equity they have in their home to make repairs or to cover other expenses. Even though a home equity loan is not used to purchase a particular asset that acts as collateral, the home itself is used as collateral on this type of loan.
- Securities-backed loans: If a borrower has a sizable stock portfolio or investment bonds, they can take out a loan using those securities as collateral for a loan. As part of the agreement, the institution will provide a certain sum of money based on how much securities the individual has. The borrower will then have to repay the funds with interest over the loan’s repayment term. If the borrower defaults, the financial institution will become the owner of the securities.
Who is a secured loan good for?
A secured loan is good for anyone who wants to purchase a big-ticket item that would take far too long to save the money needed to purchase said item. That person must also be willing and have the means to repay the loan with interest.
If you’re looking for a different type of loan, a signature loan could be an option. These loans, also referred to as unsecured loans, often provide a fixed APR and fixed monthly payments over a fixed term. You typically need good credit and a stable income to qualify for a signature loan. Let’s look at the pros and cons of secured loans, and how they compare to signature loans.
Pros of a secured loan
Lower interest rate: Unlike signature loans, secured loans have a collateral on the loan and, in turn, financial institutions are willing to offer a lower rate.
“This works because the interest rate paid by consumer and business borrowers for loans is based upon the expected risk in the loan granted which is comprised primarily of two factors,” said Mike Koch, chief lending officer for Amplify Credit Union. “First, the risk of default, which is the likelihood that the borrower will default. The anticipated risk here is based on the borrower’s credit history and ability to repay. Secondly is the loss given default. This is the anticipated loss in the event of default which is significantly impacted by any collateral that the borrower can and is willing to pledge.”
Specified purchase: When you take out a signature loan, you may go in expecting to use the loan on an important financial obligation, such as medical expenses. But once you get the loan funds, you have the flexibility to spend the money as you see fit — even if it isn’t the most responsible way to use your loan funds.
A secured loan eliminates that temptation to spend loan funds needlessly. If you borrow money to buy a car, for example, you can’t use that money for another expense.
Refinancing options: Since the financial institution has the legal right to the collateral, it can also re-adjust the terms of the loan to make sure it is paid in full. A person who took out a mortgage may find that they are in a much better or worse financial situation 10 years into the mortgage. They can contact the bank to refinance the remainder of the loan to obtain a lower interest rate or payment depending on approval from the institution.
Cons of a secured loan
Losing the collateral: If you default on a signature loan, your credit score will take a hit. In the case of a secured loan, though, not only will you face that issue, but you’ll also lose your collateral. That could mean losing your house or car.
Variable interest rates: Although secured loans have lower interest rates than a signature loan, there are some that have variable interest rates that could save money at first, but then turn into a larger-than-expected payment.
“A home equity line of credit, for example, is typically tied to a floating rate instrument,” said Richard A. Muskus, president of Patriot Bank, N.A. “A borrower would be cautioned to utilize such loan proceeds for permanent purposes in a rising rate environment without a plan for principal repayment.”
Eligibility requirements for a secured loan
Secured loans, like signature loans, will have certain requirements an individual must meet to be approved for the loan.
Credit history and score: As is the case with any funds borrowed from a financial institution, your credit history and score will be a major factor in whether or not you’ll get approved. Loans will have different credit score requirements depending on what is used as collateral. A credit score will also determine what kind of interest rate you may receive.
Income: Borrowers must have a certain amount of income to be approved for a secured loan. Financial institutions will typically have a formula to determine how much you can afford based on other debts and your income. This is just as big of a factor to be approved as credit history.
Should you consider a signature loan instead?
When determining whether to go with a signature loan or a secured loan, it comes down to paying extra to outright own an item. An unsecured loan will carry a higher interest rate, but whatever you buy with your loan funds will be yours from the get-go. You will, however, likely pay several interest rate points higher, which would likely mean a higher monthly payment.
Interested in a personal loan?Here are the top personal loan lenders of 2019!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.95% to 35.89%*. The origination fee ranges from 1% to 6% of the original principal balance and is deducted from your loan proceeds. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at the time of application. The average origination fee is 5.49% as of Q1 2017. In Georgia, the minimum loan amount is $3,025. In Massachusetts, the minimum loan amount is $6,025 if your APR is greater than 12%. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months. Borrower must be a U.S. citizen, permanent resident or be in the United States on a valid long term visa and at least 18 years old. Valid bank account and Social Security number are required. Equal Housing Lender. All loans are subject to credit approval. LendingClub’s physical address is: LendingClub, 71 Stevenson Street, Suite 1000, San Francisco, CA 94105.
†Per reviews collected and authenticated by Bazaarvoice in compliance with the Bazaarvoice Authentication Requirements, supported by anti-fraud technology and human analysis. All reviews can be reviewed at reviews.lendingclub.com
**Based on approximately 60% of borrowers who received offers through LendingClub’s marketing partners between January 1, 2018 to July 20,2018. The time it will take to fund your loan may vary.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|5.74% – 16.99%1||$5,000 - $100,000|
|7.54% – 35.99%||$1,000 - $50,000|
|7.99% – 35.89%*||$1,000 - $50,000|
|5.99% – 24.99%2||$5,000 - $35,000|
|5.99% – 29.99%3||$7,500 - $40,000|
|6.79% – 20.89%4||$5,000 - $50,000|
|9.99% – 35.99%5||$2,000 - $25,000|
|6.95% – 35.89%6||$1,000 - $40,000|
|6.99% – 18.24%7||$5,000 - $75,000|
|9.95% – 35.99%8||$2,000 - $35,000|