Key insights:
- Secured loans require collateral, which can help you qualify and potentially access better terms
- Missing payments could result in losing the asset tied to the loan
- Comparing secured and unsecured loans can help you understand differences in approval requirements, interest rates and risks before choosing what fits your financial situation
When working with a lender to obtain funds, you may come across secured loan options. These are loans backed by collateral, which is an asset you own that often has a value equal to or greater than the amount you’re borrowing. These types of loans can help you afford a car, home or other big purchases, but missing payments can have serious consequences. Understanding the pros and cons of secured loans can make you more confident as you work toward building your future.
How do secured loans work?
A secured loan is any loan that is backed by collateral. For example, a mortgage is secured by the home you purchase, and an auto loan is secured by the car you’re financing.
Many secured loans are installment loans, which means you borrow a lump sum and repay it in monthly installments over a set period. However, if you miss your payments, you risk losing your collateral. That means the lender could take possession of your home, car or other collateral.
How do I apply for a secured loan?
Applying for a secured loan may be different than applying for an unsecured loan, which doesn’t require collateral. It usually involves these steps:
- Research: Consider whether a secured loan is right for you. Compare lenders to understand your options for interest rates and terms and application requirements.
- Apply: Complete an application online or in person. Remember to collect all required supporting documents before you apply and be aware that the application may trigger a hard credit check.
- Approval: The lender reviews your application, confirms the value of your collateral and evaluates your creditworthiness to determine whether you qualify.
- Review and sign the loan agreement: If you’re approved, the lender will typically provide a loan agreement that outlines specifics like the amount you’ll receive, interest rate, payment due dates, term and collateral details.
- Access funds: Once everything has been signed, congrats! Your lender will typically send the funds directly to you or a third party, such as a car dealership or an escrow agent.
Depending on local regulations, lender policies and the type of loan, additional steps may be necessary. For example, your lender could require a home appraisal before approving your mortgage.
Types of secured loans
A secured loan requires collateral, such as a physical or financial asset. Here are some common secured loans you may encounter:
| Type of secured loan |
Common forms of collateral |
| Auto loan |
Vehicle you’re financing |
| Mortgage |
Home you’re purchasing |
| Home equity loan |
Equity of your home (the monetary difference between your home’s current worth and the amount of money owed on the mortgage) |
| Car title loan |
Title of a vehicle you own free and clear |
| Secured personal loan |
Stock, certificate of deposit (CD), vehicle, real estate or other valuables |
Benefits and drawbacks of secured loans
Secured loans may be an option to meet your financial goals, but there are pros and cons to consider before you sign any agreement.
Secured loan benefits
- Potential for more favorable loan terms: Some secured loans may offer more favorable terms, such as lower interest rates and higher borrowing limits
- Easier qualification: Because collateral reduces the lender’s financial risk, secured loans may be easier to qualify for than an unsecured loan
- Opportunity to build credit: Making on-time payments on your secured loan may improve your payment history and overall creditworthiness
Secured loan drawbacks
- Risk of losing collateral: If you miss payments on your loan, the lender may take ownership of your collateral.
- Longer approval timelines: Secured loans can involve more steps than unsecured loans. You may need to provide documents that confirm your ownership of the collateral. The lender may also need to confirm the condition and value of the collateral, which may require an appraisal.
Secured vs. unsecured loans
The key difference between secured loans and unsecured loans is collateral.
Unsecured personal loans don’t require collateral. Approval primarily depends on your creditworthiness and other financial factors, such as your debt-to-income ratio (DTI) and income. Consequences for missed payments can vary. Missing payments on an unsecured loan can mean late fees and credit damage. The same can happen with a secured loan, but with the added risk that your lender can also seize your collateral.
Understanding how secured loans can help
Secured loans may be a way to access funding, but it’s important to understand if they’re the right fit for your goals. These loans can offer access to funding if you don’t meet the requirements for other types of loans, but they come with greater risk. Take the time to weigh your options before applying to any type of loan so you can feel confident in your decision.
Disclosure: This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.
