What Is a Secured Loan? - SmartAsset

A secured loan is a loan that is backed by collateral. A borrower can secure a personal loan with an asset like a savings account, a car or home equity. If you need money to help you pay off a debt or invest in your home you may be looking at personal loans. So how do you decide if a secured or unsecured loan is right for you? We’ll help you weigh the pros and cons.

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Why Choose a Personal Loan?

First off, let’s talk about why you might want a personal loan. Personal loans are generally not recommended for personal consumption. If you’re dying to take a trip or invest in a new wardrobe you’re probably better off saving up for it.

Personal loans come into their own when they’re used to pay off high-interest credit card debt, eliminate medical bills or enable a needed investment in a home. When it comes to home improvement, it generally makes more sense to use a personal loan for something like a new roof than for new decor.

Secured Loans vs. Unsecured Loans

If you’ve made up your mind to start shopping for a personal loan you’ll have to choose between a secured loan and an unsecured loan. Secured loans have some advantages. Because they have collateral lenders can seize, secured loans generally come with lower interest rates. They’re also easier to get because they are less risky for the lender. If your credit is only so-so, you’ll have an easier time getting and financing a loan if you go with a secured loan. That’s the good news.

The bad news is that if you run into trouble keeping up with your loan payments you’ll lose the asset you used to secure the loan. That’s right. You could lose your family home, the car you use to get to work or the savings account you’ve worked hard to build. If you already have a secured loan like a car loan or a mortgage you might not want to take on another.

Word to the Wise

When times get tough, it’s generally recommended that you make payments on secured loans before making payments on unsecured loans. That way, you won’t lose your car because you paid off your credit card bill instead of making your car loan payment. Too many secured loans can leave you scrambling. If your income is unpredictable, an unsecured loan might be a safer bet.

Bottom Line

Whether you choose a secured loan or an unsecured loan, it’s important to only borrow as much as you can afford. A secured loan calculator can help you figure out what your monthly payments are likely to be for various loan amounts and interest rates.

If you decide to borrow, shop around for the best deal you can get. Check with credit unions, traditional banks, online lenders and peer-to-peer lending sites. And if you have some time before you’ll need the money, work on building up your credit. Your high credit score will translate into lower interest rates on your loan.

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