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Table of Contents

• What Are Secured Loans?
• How Secured Loans Work
• Secured Loan Types
• How To Find Them & What to Look For
• The Bottom Line

What Is a Secured Loan? How They Work, Types, and How To Get One

By 

Christian Allred

Updated March 31, 2025

Fact checked by 

Jen Hubley Luckwaldt

Definition

A secured loan is a loan backed by collateral. Common examples include mortgages and car loans, where the asset being financed can be seized by the lender if the borrower defaults.

What Are Secured Loans?

A secured loan is a type of loan that requires you to pledge an asset as collateral. If you default, the lender can seize the collateral to recoup their losses. This lowers the lender’s risk, allowing it to extend secured loans at lower interest rates and to borrowers it wouldn’t otherwise approve.

Key Takeaways

• A secured loan is backed by collateral, a valuable asset you own or plan to finance with the loan (like a house or car).
• Should you default on a secured loan, the lender can take possession of your collateral to recoup their losses.
• Business loans are often secured by business assets, such as company vehicles or property, though they may also require a personal guarantee.

How Secured Loans Work

To understand how secured loans work, it helps to contrast them with unsecured loans. Unsecured loans don’t require collateral, your creditworthiness is determined by your credit score and financial history. In other words, if you default on the loan, your credit will suffer, but the lender’s options for recourse are limited.

Fast Fact

Should you default on an unsecured loan, the lender may hire a third-party collection agency, pursue legal action, or negotiate a new repayment plan with you.

With secured loans, borrowers have to put up collateral, the value of which directly impacts the lender’s risk. For example, suppose you take out a $200,000 mortgage on a $300,000 house. The lender will likely be more comfortable lending to you because, in the event that you default on the loan, it can foreclose on the property. The lender could then sell the home to recover some, if not all, of their losses.

Secured Loan Types

Below are the most common types of secured loans for individuals:

• Mortgage: Used to purchase a home, with the property acting as collateral. Typical loan terms are 15 or 30 years.
• Vehicle loan: Used to purchase a vehicle (like a car), which serves as the collateral. If you default, the lender can repossess the vehicle. 
• Secured personal loan: Secured by an asset like savings or personal property. You can typically use the loan funds for almost anything.1
• Home equity loan: Backed by the equity in your home, often for major expenses like renovations.
• Home equity line of credit (HELOC): A revolving credit line that lets you borrow, repay, and borrow again—up to a certain credit limit—that’s also backed by your home equity.
• Secured credit card: Backed by a cash deposit, which also serves as the credit limit. It’s a revolving credit line designed to help you build (or rebuild) your credit.
• Life insurance loan: Taken against the cash value of a life insurance policy, with the policy acting as collateral. You can repay the loan or have the balance deducted from the death benefit paid to your beneficiaries when you pass away.
• Car title loan: Backed by your car title, usually for amounts ranging from 25% to 50% of the car’s value.2
• Share-secured loan: Backed by a savings account or certificate of deposit (CD), often with lower interest rates than unsecured loans.3
• Pawnshop loan: A small, short-term loan where you leave a valuable item, such as jewelry or electronics, with a pawnshop as collateral.
• Bad credit loan: Designed for borrowers with poor credit, but typically loan sizes are small, repayment periods are short, and rates are high.

Business Loans

Businesses can also get secured loans. They similarly require collateral, such as a commercial property or business vehicle.4 Many business loans—including secured ones—require a personal guarantee. This would mean that you, as the business owner, are responsible for repaying the loan in the event of a default.

Other types of secured loans include car title loans and pawnshop loans. Car title loans allow you to borrow money using your car title as collateral. Pawnshop loans can use anything from tools to jewelry to video game consoles as collateral, depending on what you’re willing to pawn. These are generally short-term loans that allow you to borrow small amounts of money.

A life insurance loan lets you borrow money against a life insurance policy using its cash value as collateral. You could then repay the loan during your lifetime or allow the loan amount to be deducted from the death benefit paid to your beneficiaries when you pass away. This type of loan is available with permanent life insurance policies, such as variable or whole life insurance.

Bad credit personal loans are another category of secured loans. These are personal loans that are designed for people with poor credit history. Lenders can offer bad credit personal loans, but they may require some type of cash security, similar to share-secured loans, secured credit cards, and secured lines of credit. Note that a lower credit score can translate to a higher interest rate and/or fees with a bad credit secured loan.

How To Find Secured Loans and What To Look For

You can get most types of secured loans from a bank, credit union, or online lender. When shopping around for one, pay attention to the following:

• Collateral requirements: Understand what type of asset you need to pledge and how valuable it has to be.
• Credit and income requirements: Ensure you meet the lender’s minimum credit score and income criteria.
• Interest rate: The lower, the better. A slight difference in interest rate can have a big impact on the final cost of the loan. 
• Interest rate type: A fixed rate stays the same throughout the life of the loan, while a variable rate can change with market conditions over time, presenting more risk. 
• Fees: Check what fees the lender charges, such as application, origination, or prepayment fees.
• Loan term: Consider the repayment period and how it’ll affect your monthly payment and total interest costs.
• Loan limits: Make sure the lender’s minimum and maximum loan limits are appropriate for the amount you need to borrow.
• Lender reputation: Check online reviews and ratings to ensure the lender has a positive track record with past borrowers.

By taking into account the factors listed above, it’ll be easier to find the best loan option to suit your needs. You may also want to enter loan details into a loan calculator to confirm that the monthly payment amount is affordable.

The Bottom Line

A secured loan can be a great borrowing option if you own a valuable asset (or plan to use the funds to purchase a house or car that can serve as collateral). In most cases, you’ll secure a lower interest rate and, if your credit score is less than ideal, you may have an easier time qualifying. However, be aware of the risks involved, as you’re putting your property on the line, which could be worth more than the loan itself.

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