Pros and Cons of Secured Personal Loans

Rates are lower than credit cards but you have to provide collateral

A borrower looks over her secured loan options.
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Secured personal loans are loans that require collateral to secure the transaction. Many personal loan options are unsecured; the lender bases your eligibility on your credit score and history. If you don’t have great credit, secured personal loans are an alternative. 

How Do Secured Personal Loans Work?

Secured personal loans are a type of personal loan that you can borrow for your personal needs but to get your loan, you need to put up collateral. Your asset serves as payment in case you default on your loan, at which point your lender can keep your collateral.

For secured personal loans, your lender determines what type of property or asset you can use to secure your loan. Some lenders let you use savings or certificate-of-deposit (CD) accounts.  For other lenders, you might be able to use art, vehicles, investments, or insurance policies. Common secured loans are mortgages, home equity loans, and auto loans.

Pros and Cons of Secured Loans

Pros
  • Pathway to eligibility

  • Many types of lenders

  • Lower interest rates

Cons
  • You could lose your collateral

  • Cash-backed loans could limit max loan amounts

  • Fewer options compared to unsecured loans

Pros Explained

Pathway to eligibility: If your credit score isn’t great or you don’t have a decent credit history, a secured personal loan gives you a chance to borrow. Otherwise, you might not qualify for a personal loan.

Many types of lenders: Banks, credit unions, and online lenders offer secured personal loans. This gives you the chance to explore multiple lenders to compare rates, fees, and repayment terms.

Lower interest rates: Personal loans tend to have lower interest rates compared to other types of borrowing, like credit cards. The average credit card interest rate is more than 20%. Personal loan interest rates for two-year repayment terms are half that, on average.

Cons Explained

You could lose your collateral: A secured loan means you’re putting up an asset in exchange for a loan. If you don’t repay your loan on time, you could lose your asset and your credit score could tank if you’re more than 30 days late.

Cash-backed loans could limit max loan amounts: If you need to borrow $10,000 but you only have $5,000 in a CD, you might only be eligible to take out a $5,000 secured loan. If you don’t have enough valuable assets to cover your loan, you may not be able to borrow what you need.

Fewer options compared to unsecured loans: There are banks, credit unions, and online lenders that offer secured personal loans, but you’ll have fewer options compared to unsecured personal loans. If you don’t qualify with the few options you have, you may need to look into alternatives.

Alternatives to Secured Personal Loans

If you don’t qualify for a secured loan, you may want to consider some other options, including:

Credit Card

If allowed, you can make a payment using a credit card you already have. Not every merchant or lender allows credit card payments but many do.

Peer-to-Peer Loan

Peer-to-peer loans are like personal loans, but instead of having an institution or online lender give you money, your request goes into a marketplace of investors. Depending on how much you need, you could have one lender or many. Collateral isn’t required but your credit matters. 

Cash Advance

You can get a cash advance through a salary advance at your job or through your credit card. Credit-card cash advances tend to have more fees and higher interest rates compared to regular credit card interest rates.

Side Hustle

Instead of borrowing money, you can get a side hustle and earn some extra cash. Side hustles are jobs you can do around your day job, usually making money off your hobbies.

Co-Signer

If you don’t qualify for a loan on your own, consider asking a trusted friend or relative to serve as a co-signer.

401(k) Loan

A 401(k) loan is a loan from your future self. You borrow money from your retirement and make payments until your loan is paid in full, usually up to five years. Your interest rate is determined by your plan administrator and you usually don’t need collateral.

Key Takeaways

  • A secured personal loan may not be your best personal loan choice but could be your only borrowing option. 
  • Secured personal loans use assets as collateral, like savings accounts, CDs, or vehicles like a motorcycle or RV.
  • If you don’t make on-time payments to your secured personal loan, you could lose your collateral.
  • If you don’t qualify for a secured personal loan on your own, you may need to get the help of a co-signer.