Secured Personal Loans: How Do They Work & What Are the Best Options?

Everyone needs an infusion of quick cash sometimes. Thanks to the growth of online personal loan lenders in recent years, it’s easier than ever to find the funds you need. Although personal loans are often used for debt consolidation, the truth is that they can be used for any purpose.

There are two types of personal loans — secured and unsecured. Unsecured personal loans are widely available and used more often, but there are cases where a secured loan might make more sense. For example, borrowers with poor credit or those who need to borrow a larger amount of money might not be able to qualify for an unsecured personal loan, so providing collateral can help improve their chances at approval.

Here’s what you need to know about secured personal loans.

In this guide:

• Secured Personal Loans
• Secured vs Unsecured Loans
• Risks & Benefits of Unsecured Loans
• Risks & Benefits of Secured Loans
• What to Consider When Applying for a Loan

Secured Personal Loans

If you decide a personal loan is right for you, here are some lenders that offer secured loans:

• OneMain Financial: OneMain is one of the biggest online lenders and also has brick-and-mortar stores. You can get both secured and unsecured loans from OneMain.
• Mariner Finance: This lender caters particularly to borrowers with poor credit or lower incomes. If you want to borrow more than $10,000, you have to get a secured loan.
• LightStream: The online lending arm of SunTrust Bank offers competitive financing on unsecured loans. If you don’t qualify for an unsecured loan, though, LightStream offers a secured personal loan alternative.
• Finova Financial: For those looking for alternatives to high-rate auto title loans (a form of payday loans, which should be considered an absolute last resort in a financial emergency), Finova offers longer-term auto title loans with slightly better terms.
• Wells Fargo: Most Wells Fargo personal loans are unsecured and require a high credit score. However, if you have a savings account or certificate of deposit (CD) to use as collateral, you might be able to get better terms.
• PNC Bank: PNC Banks accepts cars, RVs, boats, and other vehicles as collateral for its secured personal loans.
• Navy Federal Credit Union: This is one of the best credit unions in the United States, and it offers secured loans based on a CD pledged as collateral for the loan.

Compare loan offers to find the best loan rates and terms before making your choice. Another type of loan you might consider is a home equity line of credit, which will probably have a lower interest rate than both unsecured and secured personal loans. A credit card with a 0% introductory interest rate is yet another option for short-term funding needs.

Difference Between Secured and Unsecured Loans

When getting a personal loan, it’s important to understand the difference between secured and unsecured loans.

Unsecured Personal Loans

• Don’t require collateral
• Allow you to borrow between $1,000 and $50,000 (sometimes more)
• Rely heavily on credit score and credit report, income stability, and debt-to-income ratio

Secured Personal Loans

• Involve the promise of a valuable item as collateral
• Take into account the value of your collateral
• Might allow you to borrow more money with longer repayment periods
• Can be an alternative if you fail to pass a credit check

With a secured loan, more of the risk belongs to the borrower, since they can lose their collateral. Unsecured loans can have stricter standards because the bank assumes more of the risk if you become unable to repay the loan.

Risks and Benefits of Using Unsecured Loans

Before you make a decision about which type of loan to apply for, consider the risks and benefits of both unsecured and secured loans. Borrowers like unsecured personal loans because they don’t require them to risk any of their assets. Additionally, applications can be reviewed quickly and loan funding can take place as soon as the same business day.

On the other hand, one of the risks with an unsecured loan is a higher interest rate, which increases the cost of borrowing money, especially if you don’t have excellent credit. Additionally, if your credit score isn’t high enough or you have a high debt-to-income ratio, you might not qualify at all.

Risks and Benefits of Using Secured Loans

For some borrowers, secured loans offer a good alternative to unsecured personal loans. However, before you move forward, it’s important to have a clear idea of the risks and benefits of using collateral to secure funding.

Benefits

• It’s possible to get a lower interest rate. If you can’t qualify for an unsecured loan at a rate you want, you might be able to get a better rate by offering collateral to minimize the risk to your lender.
• You might qualify for larger loan amounts. If you have a valuable asset, such as a car or other type of personal property, you might be approved for more money than you would with an unsecured loan.
• Lenders are willing to accept many different types of collateral. Cars, jewelry, artwork, stocks, business equipment, and even your savings account can all be considered collateral for a secured loan.
• You might get a longer repayment term. Because you have collateral, a lender might be willing to let you repay the loan over a longer period of time.
• Your credit might be less of a factor. Although your credit will be considered, the value of your collateral might make more of a difference, particularly if you have a spotty credit history.

Risks

• You could lose your asset if you don’t make payments. If you go into default, the lender can repossess your asset to help recoup the remaining balance of your loan.
• Some secured loans have higher fees, making them more expensive in the long run.
• You might have to purchase additional insurance to further protect the lender in the event of default.
• It can take longer to process a secured loan, so you might not get your money until after your collateral has been appraised and accepted.
• A secured personal loan might not help your credit. In some cases, other lenders might even see a secured loan as a red flag that indicates you couldn’t qualify for an unsecured loan.

Even with the added risks, some borrowers can benefit from getting a secured loan, especially if they don’t have a lot of other options for getting the funding they need.

Things to Consider When Applying for Personal Loans

Before you apply for any personal loan, think about how the funds will help you reach your financial goals and consider whether the advantages outweigh the risks. Before you move forward, here are some things to think about.

Credit Score

Check your credit score before you apply. The better your credit score, the more likely you are to receive a low interest rate. If you can take time to improve your credit score and apply for an unsecured loan, it might make sense to wait. On the other hand, if you have poor credit and need the funding soon, a secured loan might be your only choice.

>> Read More: ​​​​What Credit Score Do You Need for a Personal Loan?

Interest Rate

Anytime you get a loan, you need to consider the interest rate and how much you’ll have to repay on top of the principal balance. If an unsecured loan comes with an annual percentage rate (APR) of 36% but you can get a secured personal loan for 15% APR, that can save you hundreds of dollars over the life of your loan. Your credit score will be a major factor in determining the interest rates for which you may qualify.

Loan Terms

The shorter the loan term, the higher your monthly payment. If you need a longer loan term to help you manage cash flow, that’s something to take into consideration.

Also, find out whether the loan comes with prepayment penalties or origination fees that may increase the cost of borrowing — and your monthly payments.

Loan Purpose

Personal loans are available for just about any purpose, including vacations, weddings, home improvements, medical expenses, and debt consolidation. If you need funds because of an emergency — i.e. your car broke down or you need to replace a major appliance — it may be worth it to go into debt.

But if you’re considering using the money for a vacation or other luxury expenses, taking out a personal loan may not be worth it in the long run.

Bottom Line

Depending on your situation, a personal loan can help you get the funding you need to meet short-term financial goals. If you don’t have good credit and are unable to qualify for a low-rate unsecured loan, a secured personal loan might be another option.

It’s important to understand that a secured loan means you’re putting an asset at risk. You might be able to qualify for funding at a lower rate than an unsecured personal loan, but make sure it’s worth the risk before you put something valuable on the line.