A secured personal loan requires you to pledge an asset as collateral, which the lender can take if you don't repay

A secured personal loan is money you borrow against something you own — typically a car, savings account, or other valuable property. If you stop making payments, the lender has the legal right to seize that asset to recover what you owe. Because the lender has collateral to fall back on, secured loans usually come with lower interest rates than unsecured personal loans, where nothing backs the debt.

The trade-off is straightforward: you get cheaper borrowing, but you risk losing the thing you put up. This matters most when the collateral is something you depend on daily, like a vehicle, or something you've built over time, like savings.

Key Takeaways

  • Secured loans require collateral — an asset the lender can seize if you default — while unsecured loans do not.
  • Interest rates on secured loans are typically 2 to 5 percentage points lower than unsecured rates because the lender's risk is lower.
  • The lender will conduct a valuation of your collateral and may lend only a portion of what it's worth, usually 50 to 90 percent.
  • If you default, the lender can repossess the collateral without going to court in most states, though some states require notice and a waiting period.
  • Secured loans appear on your credit report the same way unsecured loans do, so on-time payments help your credit score equally.

What assets lenders typically accept as collateral

The most common collateral is a vehicle — either one you already own free and clear, or one you're financing through the lender. A car title loan, where you borrow against a paid-off vehicle, is a specific type of secured loan that's widely available but carries high interest rates (often 25 to 300 percent annually) because the loans are usually small and short-term.

Savings accounts and certificates of deposit (CDs) are also frequently accepted. Borrowing against your own savings sounds counterintuitive, but it can make sense if you need cash now and want to avoid disrupting a long-term savings goal or CD that's earning interest. The lender simply freezes that account until you repay.

Some lenders accept home equity — the difference between what your house is worth and what you owe on your mortgage — through a home equity loan or home equity line of credit (HELOC). These are secured loans, but they're a separate category because they involve real estate and carry different legal processes than personal loans.

Less commonly, lenders may accept jewelry, collectibles, or other valuables, though most personal loan lenders stick to vehicles and cash accounts because those are easier to value and liquidate.

How the loan amount is determined

The lender will order a valuation of your collateral. For a vehicle, this usually means checking its market value using tools like NADA Guides or Kelley Blue Book. For a savings account, the valuation is straightforward — it's whatever balance you have.

Lenders typically lend between 50 and 90 percent of the collateral's value, depending on the asset type and the lender's policies. A car might support a loan of 80 percent of its value, while a savings account might support 90 percent because it's less risky to liquidate. This cushion protects the lender if the collateral loses value or sells for less than expected.

Your credit score and income still matter. Even with collateral, lenders run a credit check and verify income to assess whether you're likely to repay. A very poor credit score might mean a lower loan amount or a higher interest rate, even though collateral is involved.

Interest rates and fees on secured loans

Secured loans typically carry interest rates 2 to 5 percentage points lower than unsecured personal loans from the same lender. If unsecured rates are running 15 to 20 percent, a secured loan might be 10 to 15 percent. The exact rate depends on your credit score, the loan term, the type of collateral, and the lender's pricing.

Car title loans are an exception: despite being secured, they often charge 25 to 300 percent annual interest because they're designed as short-term loans (30 to 120 days) for borrowers with poor credit. The high rate reflects both the short term and the lender's expectation that many borrowers will roll over or renew the loan repeatedly.

Beyond interest, watch for origination fees (typically 1 to 8 percent of the loan amount), appraisal fees (usually $50 to $200 for a vehicle), and prepayment penalties. Some lenders charge a fee if you pay off the loan early, though this is less common on personal loans than on mortgages.

What happens if you can't repay

If you miss payments, the lender will typically send notices and may try to contact you by phone. The exact timeline before repossession varies by state and lender, but most lenders wait 60 to 90 days of missed payments before taking action.

Once the lender decides to repossess, the process differs by collateral type. For a vehicle, a repossession agent can typically take the car without a court order in most states, though some states require the lender to send notice and wait a set number of days. For collateral held by the lender — like a frozen savings account — the lender simply applies that balance to your debt.

After repossession, the lender sells the collateral and applies the proceeds to what you owe. If the sale doesn't cover the full debt, you may still owe the difference, called a deficiency. Some states limit deficiency claims or require the lender to prove they sold the collateral at fair market value; others allow deficiency claims with fewer restrictions.

Repossession damages your credit report for seven years and can make it harder to borrow in the future. It also appears as a public record in some cases, which can affect employment or housing decisions.

Secured loans versus unsecured personal loans

The main differences come down to rate, risk, and speed. Secured loans have lower rates because the lender has collateral to recover losses. Unsecured loans have higher rates but don't put your assets at risk if you default — the lender's only recourse is to report the debt to credit bureaus, sue you, or send the account to a collection agency.

Secured loans may also be faster to fund because the collateral reduces the lender's uncertainty. Some lenders can fund a secured loan within one to three business days, while unsecured loans might take five to seven days.

Unsecured loans are better if you can't afford to risk losing an asset or if you don't have collateral to offer. Secured loans make sense if you have collateral you're willing to pledge and you want a lower rate or need to borrow a larger amount than you'd may have access to for unsecured.

How secured loans affect your credit

A secured loan appears on your credit report the same way an unsecured loan does. The lender reports the account to the three major credit bureaus (Equifax, Experian, and TransUnion), and your payment history — on-time or late — affects your credit score equally.

Taking out a secured loan will temporarily lower your score because it's a new account and a hard inquiry. Over time, making on-time payments will help your score recover and grow, because payment history is the largest factor in credit scoring (about 35 percent of your FICO score).

If you default and the collateral is repossessed, that appears on your credit report as a negative mark and can lower your score significantly. The repossession stays on your report for seven years.

Frequently Asked Questions

Can I get a secured loan if I have bad credit?

Yes. Collateral reduces the lender's risk, so secured loans are often available to people with poor credit who wouldn't may have access to for unsecured loans. However, a low credit score may still result in a higher interest rate or a smaller loan amount, even with collateral.

What if my collateral loses value while I'm repaying?

The lender's claim is fixed at the time you borrow. If your car depreciates or your home loses value, you still owe the full loan amount. However, if the collateral becomes worth much less than the loan, you may end up owing a deficiency if you default and the lender sells it.

Can I use a secured loan to rebuild credit?

Yes, if you make all payments on time. Secured loans report to credit bureaus just like unsecured loans, so consistent on-time payments help your score. Some lenders specifically market secured loans as credit-building tools, though the interest rate may be higher than other secured loans.

What's the difference between a secured loan and a pawn?

In a pawn, you hand over the item immediately and receive cash. You have a set time to repay and reclaim it. In a secured loan, you keep the collateral (usually) and make monthly payments. If you default on a secured loan, the lender repossesses it; if you don't reclaim a pawn, the pawnbroker keeps it and sells it.

Do I need a co-signer for a secured loan?

Usually not. Collateral reduces the lender's need for a co-signer. However, if your credit is very poor or your income is low, a lender might still ask for a co-signer as an extra safeguard, even with collateral.