What Is a Secured Loan and How Does It Work?

A secured loan is a loan that’s backed by collateral — something tangible the lender can take if the loan isn’t paid. A common example is a mortgage, where the home itself secures the loan.

Because lenders can recover losses from the collateral, secured loans typically come with lower interest rates than unsecured loans. But that also means you’re putting your asset at risk if you fall behind on payments.

Here’s what to know about how secured loans work and whether they’re the right fit for you.

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Key Takeaways

• A secured loan is backed by collateral — an asset like a home, car or savings account that the lender can seize if you stop making payments. Because lenders can recover losses, secured loans typically come with lower interest rates than unsecured loans.

• Common types include mortgages, auto loans, home equity loans and secured personal loans, each using a different asset as collateral and serving a specific purpose — from buying a home to consolidating debt.

• Defaulting on a secured loan puts your asset at real risk — missed payments can trigger repossession or foreclosure, a lawsuit for any remaining balance and lasting damage to your credit score.

• A secured loan is a strong fit if you have collateral, fair or poor credit or need to borrow a large amount, but it's not ideal if you need quick cash, have no valuable assets or already qualify for competitive unsecured terms.

• To get started, check your credit and the value of your collateral, then compare banks, online lenders and credit unions to find the best rate and terms before you apply.

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How Does a Secured Loan Work?

A secured loan is backed by collateral. A lender considers your borrower profile alongside the asset’s value. The borrower profile can include credit score, income and existing debt.

The collateral valuation is based on appraisals or market estimates — like Kelly Blue Book.

Loan-to-Value (LTV)

The secured loan lender will evaluate how much the asset’s value is compared to the amount you’re trying to borrow. If your LTV is lower, then your rates are more favorable.

Repayment Structure

You’ll be required to make monthly payments over a certain term. Missing payments can lead to the repossession of the asset.

What Types of Secured Loans Are There?

There are several types of secured loans, from personal loans to title loans. Each comes with its own features and use cases.

What Can Be Used as Collateral?

Here are some of the most common types of collateral and what to consider for each:

Savings or CD Accounts

• Pro: Low risk of rejection by lenders

• Con: Funds are locked until loan is repaid

Paid-Off Vehicle

• Pro: Fast approval and access to funds

• Con: Risk of losing transportation if you default

Home Equity

• Pro: Lower interest rates

• Con: Risk of foreclosure if you fail to repay

Investments

• Pro: Potential tax efficiency

• Con: Market downturns may trigger a margin call

What Happens if You Default on a Secured Loan?

Defaulting on a secured loan can have serious consequences. Here’s what to expect:

• Acceleration of debt: Typically, after 30 to 90 days of nonpayment, the secured lender will accelerate the entire debt.

• Collateral will be seized: The lender will take the asset secured by the debt. They will take your car, home or savings.

• You owe the deficiency balance: The lender will likely sell the collateral and apply whatever amount is received toward the debt. You must pay the remaining amount due.

• The lender may file a lawsuit: To collect that deficiency balance, the lender may file a lawsuit to recover that amount.

Secured vs. Unsecured Loans: What’s the Difference?

The biggest difference between a secured and an unsecured loan is the presence of collateral. A secured loan requires collateral, while an unsecured personal loan doesn’t.

Here’s a side-by-side look at secured vs. unsecured loans:

Pros and Cons of Secured Loans

Secured loans can offer benefits, but they also come with risks to consider:

Pros

• Lower interest rates

• Easier to qualify, even with bad credit

• Can borrow more money

Cons

• Risk of losing your collateral

• May have a longer application process, including appraisal of collateral

• Not ideal for small loan amounts

Quick Example: Secured vs. Unsecured Loan Costs

Here’s a simple example that highlights the cost differences between secured and unsecured loans:

How To Apply for a Secured Loan

Applying for a secured loan is a straightforward process. Here’s how it works:

1. Check your credit: You can pull your credit report from the major credit bureaus (Experian, TransUnion or Equifax) and check your credit score for free online. This should take 15 minutes.

2. Check the value of your collateral: You can look to Kelly Blue Book for your vehicle or get an appraisal for a home or other valuables. This could take a few minutes if it’s online, but longer if you need to get an appraisal.

3. Compare lenders: Consider the best banks, online lenders and credit unions to decide which is the best for you. Depending on how much research you do, it could take 30 minutes to a few hours.

4. Gather documents: You’ll need an ID, proof of income and documentation of collateral. This could take a few hours, depending on how accessible the documents are.

5. Apply online or in person: Applying online takes less time than applying in person. If you have all the documentation, it could take 30 minutes to an hour.

6. Comply with any additional requests from the lender: Depending on the requests, it may take one to three business days or up to a week.

7. Understand the repayment terms: Make sure you understand the monthly payment amount, interest rate and loan length. This will likely take 30 minutes.

8. Sign your loan documents and get your money: It may take one to three business days to receive funds.

How Do You Decide if a Secured Loan Is Right for You?

A secured loan is the right choice in some — but not all — situations. It can also help to compare it with other types of personal loans, depending on your needs.

Good Fit If

• You need a large loan.

• You have collateral.

• You have fair or poor credit.

Not Ideal If

• You have no valuable assets.

• You want quick, unsecured cash.

• You have very good or excellent credit.

Secured Loan FAQs

What’s a secured loan?

A secured loan is backed by collateral. If you default on the loan, the collateral can be seized.

Is a mortgage a secured loan?

A mortgage is a secured loan since the debt is secured by the house.

What can I use as collateral?

You can use your house, CDs, savings, a car or valuables for collateral.

Are secured loans safer than unsecured loans?

For lenders, a secured loan is safer since there’s some recourse if you default. For borrowers, secured loans often have lower interest rates.

What happens if I default?

If you default, the lender can accelerate the debt, seize and sell the collateral, and sue you for the balance that’s remaining on the loan. Your credit may also be damaged.

Key Terms

• Secured loan: A loan that requires you to pledge an asset as collateral. The lender can take that asset if you fail to repay as agreed.

• Collateral: An asset — such as a home, vehicle or savings account — you offer to back a loan. It reduces the lender's risk and can help you qualify for lower interest rates or larger loan amounts.

• Loan-to-value ratio (LTV): A measure of how much you're borrowing compared to the appraised value of your collateral. A lower LTV signals less risk to the lender and can result in more favorable interest rates.

• Default: Failure to repay a loan according to its terms. For most secured loans, default is triggered after roughly 90 days of missed payments.

• Foreclosure: The legal process a lender uses to take ownership of a home when a borrower fails to repay a mortgage or home equity loan.

• Deficiency balance: The amount still owed on a loan after the lender sells the collateral and applies the proceeds toward the debt. The borrower remains responsible for paying the remainder.

• Repossession: The process by which a lender reclaims a financed asset — typically a vehicle — when a borrower stops making payments.

• Unsecured loan: A loan that doesn't require collateral. Approval is based on creditworthiness, and interest rates are typically higher than on secured loans.

Sources:

• Consumer Financial Protection Bureau: What is a mortgage?

• Consumer Financial Protection Bureau: What is a home equity loan?

• Consumer Financial Protection Bureau: What is a loan default?

• U.S. Department of Housing and Urban Development: Avoiding Foreclosure

Summary generated by AI, verified by MoneyLion editors

Karen Doyle contributed to the reporting for this article.

Jasmin Baron, CCC™, contributed to editing this article.

Photo credit: Drazen Zigic / Getty Images