What Is a Secured Loan?

Nerdy takeaways

Secured loans require you to pledge collateral in order to borrow money.
Lenders review your credit, finances and the value of the collateral to qualify you for a secured loan.
If you fail to repay a secured loan, a lender can take the collateral.
Mortgages, auto loans, secured personal loans and 401(k) loans are all types of secured loans.

What is a secured loan?

A secured loan is a type of debt backed by collateral, which is something you own, such as a house, car or savings account. There are different types of secured loans, but they all have one thing in common: If you fail to repay the loan, you can lose your asset.

How much you can borrow: Loan amounts vary with secured loans and are often determined by the value of the collateral. For example, a secured home loan, or mortgage, typically covers the value of the house minus your down payment. The same goes for an auto loan. A pawn lender puts a price on your property and loans that amount.

Rates and terms: Rates and repayment terms vary on secured loans, but larger loans generally have lower rates and longer repayment terms. A pawn loan may have a triple-digit interest rate and be due in a month, while a mortgage may have a single-digit interest rate and be repaid over decades.

Secured loans also tend to have lower rates than unsecured loans because pledging collateral gives the lender something to take and sell if you fail to repay, lowering the lender's risk of losing money.

How do secured loans work?

Banks, credit unions and online lenders offer secured loans. The lender typically reviews your collateral, credit and finances to determine your eligibility. The process often includes a hard credit inquiry, but some secured loans don't require it.

Most secured loans have fixed interest rates, meaning you'll repay the loan in equal monthly installments. If the lender reports payments to the three major credit bureaus, on-time payments will build your credit, but missed payments will damage it. After multiple missed payments, the lender can take your collateral.

🤓Nerdy Tip

Car title and pawn loans are examples of no-credit-check secured loans. To make up for the risk of not checking how you've previously managed credit and assessing your ability to repay the loan, these lenders charge triple-digit rates that make the loan difficult to repay.

Types of secured loans

Secured loan type	Collateral	When to use
401(k) loan	Your 401(k).	You want a low-rate loan with no credit check. You’re comfortable repaying the loan in full — or paying a penalty — if you leave your company. Taking the loan outweighs earning compound interest on savings.
Auto loan	The vehicle you’re purchasing.	To finance a new or used vehicle.
Car title loan	Your vehicle.	You need funds fast and feel confident you can repay the loan. After you've ruled out less expensive options.
CD loan	Your certificate of deposit.	You have a certificate of deposit. You need a low-rate loan quickly. You're comfortable with the risk of losing the CD.
Crypto loan	Your crypto.	You don’t want to sell your crypto. You need a fast, no-credit-check loan. You’re comfortable adding more crypto if its value drops.
Home equity loan	Your home.	You have enough equity in your home to borrow against. To finance home improvement projects and deduct the interest on your taxes.
Mortgage	The home or property you’re purchasing.	To finance a house.
Pawn loan	A personal item.	You need a small loan quickly. Pledging a personal item is worth the risk of losing it. You don’t want to sell anything.
Secured personal loan	Typically a vehicle, savings or investment account.	As a lower-rate alternative to an unsecured loan. You're comfortable with the risk of pledging collateral.

Frequently asked questions

Is a payday loan secured or unsecured?

Payday loans are unsecured because you don’t need to provide collateral to get one. Instead, a payday lender may ask for access to your bank account and withdraw the loan amount, plus a fee, on your next payday.

Is a small business loan secured or unsecured?

Small business loans can be secured or unsecured. Lenders typically accept property or equipment as collateral. A lender may require a UCC lien on either loan type, which allows the lender to claim your business assets if you default.

Is a personal loan secured or unsecured?

Most personal loans are unsecured, but some lenders offer secured personal loans. Lenders typically accept a vehicle, savings or investment account as collateral on a secured loan.

» MORE: Compare personal loans

Are student loans secured or unsecured?

Private and federal student loans are unsecured, meaning you can’t add collateral to the application. Student loan borrowers who need help qualifying may add a co-signer with a strong credit profile.

🤓Nerdy Tip

Collateral is the key to knowing whether a loan is secured or unsecured. If you're pledging something the lender can take upon failure to repay, it's a secured loan.

Pros and cons of secured loans

Pros

Rates can be lower than unsecured alternatives.
Credit requirements may be softer.
Fixed rates keep monthly payments predictable.

Cons

You risk losing your collateral if you fail to repay the loan.
Funding time may be slower while the lender assesses collateral.

How to get a secured loan

Check your finances. Review your budget before getting any loan to understand how much you can put toward monthly repayments. Use a loan calculator to see how the interest rate and repayment terms affect the monthly payment. Check your credit reports for any errors or past-due accounts you can resolve before applying. You can get your reports for free at AnnualCreditReport.com or on NerdWallet.
Review the collateral. If you're using collateral to lower your rate or get a larger loan, check its value before you apply. You can use an online pricing guide to check a car's value for an auto-secured loan, review your savings and investment accounts for an account-secured loan or take a personal item to multiple pawn shops to see which gives the highest valuation.
Compare lenders. Look for a secured loan with a low rate and affordable monthly payments. Lenders may weigh collateral, credit and income differently, so it pays to compare. If your bank or credit union offers secured loans, start there to see if they'll include customer perks or discounts.
Apply. The application process is different for all types of secured loans. You may be able to get a secured loan online, while some banks and credit unions require an in-person visit. Applications for a secured loan may take longer than an unsecured loan because the lender must evaluate your collateral.

What if you don't repay a secured loan?

If you default on a secured loan, the lender can repossess your asset, sometimes without notice. If your home goes into foreclosure, you may end up in court.

In addition to losing your collateral, your credit and finances could suffer for years. Here are some potential consequences:

Repossession or foreclosure on your credit report for up to seven years.
Difficulty accessing credit in the future.
Still owing money on repossessed assets.
Filing for bankruptcy to keep your property.

Tips to avoid defaulting on a secured loan

Communicate with your lender. There are no consequences to your credit or finances for telling your lender you're concerned about missing a payment as long as you call before you miss it. The lender may even be able to help: Some companies have hardship programs that include payment deferrals or lower monthly payments.
Request a new payment date. If you've got a new job or added bills that make the loan's payment date challenging to honor, request a different payment date. You may also be able to change the payment frequency.
Seek credit counseling. A nonprofit credit counseling agency can provide budgeting help, debt management plans and housing counseling. Some assistance may be free.
Ask for help. If a trusted friend or family member can provide financial assistance, ask for it. Though it may be a difficult request, it could keep you from losing your property or savings.