Secured Personal Loans - Comparison of Products

With the growth of online lenders over the last several years, personal loans have become an increasingly popular financial solution for people who need a quick infusion of cash. The most popular use of personal loans is debt consolidation, but they can be used for just about any reason.

There are two types of personal loans – unsecured and secured. Unsecured personal loans are more widely used and more widely available, but secured personal loans may be a better solution for people with credit problems or people with good credit who need to borrow a larger amount of money over a longer period of time. Here we take a closer look at secured loans, sometimes referred to as collateral loans, and why someone might choose one over an unsecured loan.

Difference Between an Unsecured and Secured Personal Loan

The primary difference between an unsecured and secured loan is the way the lender protects itself against a potential default. Unsecured loans require no collateral, so the lender must rely on the creditworthiness of the borrower when approving a loan.

Lenders underwrite unsecured loans based on the borrower’s ability to repay. Generally, borrowers must have good credit, stable income, and a fairly low debt-to-income ratio. Qualified borrowers can typically borrow between $2,000 and $50,000 with terms of one to five years. The rates on unsecured loans have a wide range that currently runs from roughly 4 to 30 percent. If a borrower defaults on an unsecured loan, the lender has no recourse, but the borrower’s credit will be severely damaged.

With a secured loan, the borrower is able to provide collateral which lowers the lender’s exposure in the event of default. If the borrower is unable to repay the loan, the lender can take possession of and sell the collateralized item to pay off the loan. If the item sells for less than the loan balance, the borrower is still on the hook for the difference. A repossession can stay on your credit for seven years. Therefore, a secured loan decreases the risk for the lender and increases the risk for the borrower.

Advantages of Secured Loans

Because secured loans are less risky for lenders, they typically have lower interest rates than unsecured loans. Borrowers can expect to pay two to three points less on a secured loan. For the same reason, lenders normally allow for longer loan terms, although the interest rates would likely be higher. Also, for people with poor credit who can’t qualify for an unsecured loan or a loan with a more favorable rate, they can put up some collateral and increase their chances for loan approval with a secured loan.

Why Borrowers Tend to Prefer Unsecured Loans

Although unsecured loans have higher interest rates, many borrowers prefer them because they don’t want to put any of their assets at risk. They are also easier to obtain. With most online lenders you can apply and get approved within minutes and have funds deposited to your account within a few days.

With most secured loans, the process is a little more involved and can take a week or more to process. Also, secured loans typically come with higher fees, including prepayment fees. Some lenders require borrowers to purchase some type of insurance for a secured loan, much like private mortgage insurance (PMI) purchased on home loans.

In addition, some types of secured loans don’t do much to help your credit. In fact, they could even be detrimental to your credit as some lenders may view a secured loan as an indication that you could not qualify for an unsecured loan.

Types of Collateral for Secured Loans

The most common type of secured loan is a home mortgage. The lender places a lien on the house and property which secures the loan. Auto loans are also a form of collateral for a secured loan with the lender holding the title until the loan is paid off. Secured loans can also be used for boat and RV purchases.

Technically, some lenders will accept anything with value as collateral as long it is allowed by law. However, most lenders prefer assets that are easy to collect and readily converted into cash. The most common types of non-real estate collateral accepted by lenders are cars and savings.

Investors can use their stock holdings as collateral for a loan. This is usually set up between the investor and a securities firm or private bank that holds the securities. Investors can typically borrow up to 90 percent of the value of the pledged securities. The risk to investors is if there is a decline in the stock market and the value of their pledged securities decline. That could result in the lender calling the loan or requiring extra cash to avoid selling the securities at a loss.

Business owners often use secured loans as a quick and easy source of capital. Businesses can use equipment, inventory, and receivables to secure short-term finances. If a business does not have any assets to pledge as security, the business owner may pledge personal assets as collateral.

Using Your Car as Collateral

The most widely used collateral for securing personal loans are cars. These loans are referred to as auto equity loans and they allow you to borrow money against the fair market value of your fully paid-for car. Most lenders will only accept cars that are less than eight years old and you will need to have full collision and comprehensive coverage to protect the lender in the event the car is severely damaged or totaled. If you don’t have full coverage on your car, you may be required to purchase credit insurance, which can be more expensive.

An auto equity loan, which is available from traditional lenders as well as some online lenders, should not be confused with an auto title loan, which is typically offered by subprime lenders to people who have bad credit. They don’t require a credit check but their triple-digit annual percentage rates increase your risk of having your car repossessed. Auto title loans should be avoided and are considered somewhat equivalent to payday loans; because of the likelihood of repossession, they may even be worse.

Using Your Savings as Collateral

An increasing number of lenders are now offering savings secured loans, which uses money you have in savings accounts or certificates of deposit (CDs) as collateral. Lenders usually allow you to borrow up to the value of your savings account or CD. When the loan is issued the money in your account is frozen and, as the loan is repaid, the portion not used to secure the remaining loan balance is unfrozen. With most lenders, the money you have pledged for collateral continues to earn interest.

The question that usually comes to mind is why would you borrow money and pay interest when you could use the money already sitting in savings? This might make sense if you have your money tied up in a long-term CD and you don’t want to incur an early withdrawal penalty. Some people may need quick access to funds on a temporary basis and would prefer not to cash out a CD if they know they can repay the loan in a short period of time.

The typical savings secured interest rate is around two to four points higher than the savings or CD rate. You would also benefit from a secured loan if the rate on an unsecured loan you qualify for is substantially higher than the secured loan rate. For example, if the secured loan rate is 3.5 percent, and the rate on an unsecured loan is 10 percent, you might be better off with the lower cost secured rate even though you are tying up your own money.

Secured Loans from Online Lenders

Online lenders have proliferated over the last few years providing borrowers with a wider range of options for obtaining personal loans. Most online lenders only offer unsecured loans, but there are several who now offer secured loans as well. Some online lenders may only show you a secured loan option if you apply for an unsecured loan and are turned down.

Here are four online lenders who offer the secured loan option. The advantage online lenders offer borrowers seeking a secured loan is the application and approval process is usually much easier and faster. Funds can be deposited within a manner of days once the application is approved.

OneMain Financial

OneMain Financial is actually a long-established brick and mortar lending institution with more than 1,700 branches nationwide. Once owned by Citicorp, it was acquired by consumer lending giant Springleaf Holdings. OneMain is now one of the largest online lenders, offering both unsecured and secured loans. Nearly half of its customers opt for a secured auto equity loan – many to be able to qualify for a larger loan amount or a lower rate.

Many OneMain customers apply for an auto equity loan because they can’t qualify for an unsecured loan. Loan amounts start at $1,500 with a $25,000 maximum, and loan terms of one to five years. Its lowest APR is currently 9.99 percent for its most creditworthy customers and the maximum APR is 35.99 percent. The average APR on its auto equity loans is 20 percent.

OneMain does not have a minimum credit score requirement, but borrowers need to show proof of comprehensive and collision coverage for the car. The application can be completed online and funds are available upon approval within one to three days. Fees for loan origination, late payments, and returned checks vary by state.

Mariner Finance

Mariner Finance is a subprime lender catering to people with lower incomes or poor credit. Mariner offers both unsecured and secured loans, but it typically leads with its unsecured loans. Then, if a borrower with marginal credit qualifications wants to borrow more than $10,000, it will offer a secured loan. Secured loans must be collateralized by a fully paid car with comprehensive coverage.

Loans are available between $1,000 and $25,000 for one to five year terms. Because most Mariner loans are subprime, the APRs range from 24 percent to 36 percent. Mariner has a minimum credit score requirement of 600 and only accepts vehicles less than 8 years old. You can apply online and, if approved, receive your funds as quickly as the next day. Origination and other fees vary by state. Mariner currently operates in only 20 states.

LightStream

LightStream, the online lending arm of SunTrust Bank, is one of the oldest online lenders in the industry. It offers very competitive financing on unsecured loans. LightStream doesn’t actively promote its secured loan product; rather it is offered as an option for borrowers who can’t qualify for an unsecured loan. LightStream requires a minimum credit score of 660 to qualify for an unsecured loan.

Finova Financial

Finova Financial bills itself as an auto title loan alternative. In terms of providing borrowers with poor credit an alternative to the gouging APRs offered by auto title lenders, Finova is cheaper, but only by a certain amount. It promotes an attractive current ARP range of 17 to 30 percent, which is far lower than the 300 percent charged by auto title lenders; but, by the time you add in all of the additional fees and credit insurance, the APR can be upwards of 200 percent.

The advantage that Finova offers is longer loan terms than auto title loans which are usually limited to 6 months. Finova offers loan terms up to 12 months and lower loan amounts (as low as $500) than auto equity lenders. The average loan amount for Finova customers is $1,700 and the average APR is 22 percent (before additional fees). Finova is best for borrowers with less than good credit who need quick access to short-term financing. Finova only operates in Arizona, California, Florida, New Mexico, South Carolina, and Tennessee.

Secured Loans from Banks

Most traditional banks don’t offer secured personal loans. If they do, they most likely offer loans secured with savings accounts or CDs. Of the nation’s five largest banks, only Wells Fargo offers secured loans. Some of the regional banks, such as Regions Bank, City National, and PNC also offer savings secured loans. Most banks that offer secured loans usually require the application process to be completed in a branch office with the approval and funding process possibly taking up to two weeks.

Wells Fargo

Wells Fargo, the nation’s third largest bank in terms of assets, offers savings secured loans using savings or CD accounts as collateral. Wells Fargo customers who take out secured loans do so to obtain a lower interest rate or because they couldn’t qualify for an unsecured loan. The bank offers both an installment loan and a line of credit with rates currently ranging from 5.50 percent to 13.79 percent.

The amount borrowed can be as low as $3,000 or as high as $100,000 with loan terms of one to ten years. Borrowers need a credit score of 680 or better to qualify. Although the bank relies on a borrower’s credit score, income, and debt-to-income ratio, the chances of qualifying for a loan are increased when borrowers pledge a savings account or CD as collateral. A $75 origination fee is charged on secured loans.

PNC Bank

Pittsburgh-based PNC Bank is a regional bank with branches throughout the Mid-Atlantic, Midwest, and Northeast regions. PNC will loan money on any asset that has value and can be converted to cash if it needs to be repossessed. It says it can use any vehicle, boat, or RV as collateral to finance a new or used one or to loan money that can be used for most any purpose. It will loan as little as $2,000 and as much as $100,000 depending on the type of collateral. PNC doesn’t advertise its rates on secured loans, but it offers flexible repayment terms ranging from six to 60 months.

Secured Loans from Credit Unions

Credit unions are gaining popularity among consumers who are growing weary of higher cost traditional bank products delivered in a highly impersonal manner. Owned by their members, not profit-motivated shareholders, credit unions are able to direct their profits back to their members in the form of lower lending rates and higher savings rates. Because of that, credit unions are able to offer very competitive interest rates on consumer loans, including unsecured and secured personal loans. Credit unions can be much more accommodating to people with less than great credit and, to that end, many offer secured personal loans backed by a borrower’s savings account or CD.

Navy Federal Credit Union

Navy Federal Credit Union (NFCU) is one of the largest credit unions in the U.S. with membership open to active and retired military personnel and their family members. Competitive in all of its banking and lending products, NFCU also offers a low rate savings secured loan. When you save with NFCU, you create a Shares account, which purchases shares in the credit union. You can then pledge your shares for yourself or your family to secure a loan.

You can also pledge a CD as collateral for a secured loan. For loan terms up to 60 months, the APR on a Shares Secured loan is 2 points above the interest rate earned on the shares. For loan terms longer than 60-month the APR is 3 points above the CD rates. The loan term of a CD-backed secured loan cannot be longer than the CD term. Borrowers may borrow up to 100 percent of their shares account or CD value.

Alliant Credit Union

Chicago-based Alliant Credit Union has more than 300,000 members across the U.S. Its membership is open to employees of select businesses and organizations and their family members. To see if you qualify for membership, you can enter the name of your employer or organization on the Alliant website. You can also become a member by making a $10 donation to Foster Care to Success, for which you will receive a $5 sign up bonus from Alliant.

Alliant offers savings secured loans for up to $500,000 backed by your savings account or CD. The rate on its shorter loan terms up to 48 months is currently 3.16 percent. For longer loan terms up to 60 months, the rate is currently 4.16 percent. Compare that to Alliant’s rate on its unsecured loan of 12.15 percent and you can see why some people would prefer to go the secured loan route. For its CD-secured loan, the rate is 2 points above the CD rate. Alliant allows you to borrow up to 90 percent of the CD’s value and the loan term must match the remaining term of the CD.

Final Thoughts

Secured loans can be an inexpensive source of financing for any type of borrowing need. Creditworthy borrowers can often obtain lower rates than with an unsecured loan, and borrowers with marginal credit stand a better chance of getting a loan approval when they opt for a secured loan.

Because secured loans can be a higher risk for borrowers, it is important to understand the terms and be confident in your ability to repay the loan. Between online lenders, banks, and credit unions, you have the ability to shop around for the best loan terms for your situation.

Many secured loan lenders don’t do a hard pull on your credit when you apply, which allows you to apply for multiple lenders without it hurting your credit. But always check first with the lender to see whether they do a hard or soft pull on your credit before going ahead.