This option can make borrowing more of a breeze — if you’re willing to accept more risk.
Loans aren’t free. You usually pay interest whenever you borrow (unless you get a 0% interest rate credit card), and often there are fees, too.
With a secured loan, you have an additional obligation. To demonstrate to the lender that you’re serious about repaying the money, you have to put up something that you own.
It’s basically a way of saying, “If I don’t pay you back on time, take this thing instead.”
The common trait of all secured loans is collateral. It’s the “stuff” that you have to put on the line when you take out these types of loans.
The collateral might be your house or your car. Or, you may have to put up a sum of money to back the loan.
When you secure a loan with property, you’re giving the lender more than just your word that you’ll make good on the debt. By putting an asset at stake, you’re putting more skin in the game and will be seen as a better risk.
This is why you often can get a secured loan even if you’ve got bad credit or are just starting out and don’t have much of a credit history. With a secured loan, the lender is able to reduce the risk they face when giving you a loan.
Many bank loans are unsecured, meaning you don’t have to present any collateral but are given the loan based on your credit scores, your track record with credit, and your income.
To land an unsecured loan, you might also need a co-signer: a family member or friend who vouches for you — and agrees to pay the debt if you don’t. (But seriously, it’s best if you don’t ever have to put someone in that position.)
Student loans are unsecured loans. So are most credit cards and personal loans.
Unsecured loans can be harder to get and can come with higher APRs (annual percentage rates) than secured loans.
And secured loans have another advantage: They often have higher borrowing limits, allowing you to get your hands on more money if you need it.
But unsecured loans don’t carry the risk that you could wind up losing something valuable if you run into financial trouble and are unable to repay the loan.
The most obvious example of a secured loan is a secured personal loan from a bank, a credit union or an online lender.
Here are a few other types:
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