A secured loan is an alternative to an unsecured loan, though one that isn’t as often considered. One key difference is that a secured loan is backed by physical assets, thereby making them much easier to obtain, if a bit riskier. Despite this risk, a secured loan could be exactly what you need to fund a business venture, purchase a property, or make a range of other transactions.

In this article, we will focus on secured loans, discuss what they are, how they work, and whether they could be a good option for you. Let’s get started.

What is a secured loan?

In short, secured loans are a type of loan that is secured by collateral. This collateral takes the form of physical assets, such as property, vehicles, and so on. Because secured loans require collateral, lenders typically are more concerned with the proposed collateral assets than anything else. Lenders will consider the value of your assets, how they might be used to generate an income, and the saleability of the assets. This is in stark contrast to unsecured loan lenders, which tend to place emphasis on the credit rating and income of a prospective borrower.

Once you have made a successful application for a secured loan, your lender will place a lien on the asset or assets you have offered for use as security. This lien will remain in place until the total value of your loan has been repaid completely, alongside interest and fees. If you cannot, for whatever reason, repay your loan, your lender has the right to seize collateral assets. Your lender will then sell off these assets to repay the outstanding balance of the loan.

While this focus on assets can make obtaining a secured loan much easier, especially for those with bad credit, it does come with risk. Your assets can be seized and sold in the event you default on your loan, meaning you, as the borrower, assume a higher level of risk than with unsecured loans. As such, you should carefully consider whether a secured loan is best for your situation.

Also Read: Unsecured vs. Secured Loans – Which Is Best?

Types of secured loan

Secured loans can come in many different stripes, though they all tend to be similar. Though one secured loan might be small, it will still follow the principle of being secured against an asset to incentivise repayment. Just like a larger one. That said, some are much more common. The following are some examples.

  • Mortgages: A mortgage is arguably the most common type of secured loan. As you likely know, a mortgage is a secured loan that is placed against the property it is used to fund. Should the borrower be unable to repay the loan, the property can be foreclosed and sold by the issuer in order to recoup the value of the loan.
  • Loans for land – Loans for land work much the same as mortgages. These loans can be used to purchase plots of land, either for commercial or private use, and use the purchased land as collateral. As with mortgages, this can result in your purchased land being seized by the lender if you cannot make repayments.
  • Business loans: Another common type of loan is the business loan. Business loans can be used to fund a wide range of things, from covering equipment costs, to funding projects or expansions. They tend to be quite flexible, as there is just as wide a variety of assets to use as collateral. Property, stock, equipment, and pretty much anything else owned by a business can be used, provided it meets the value of the loan. As with any other secured loan, any assets placed as collateral can be seized in the event you cannot repay.
  • Bridging loans: A bridging loan is another common type of secured loan, one that encompasses a much wider range of scenarios. In summary, bridging loans are taken as a flexible means to raise short-term capital, usually to purchase property, though can be used for almost anything you can think of. Like any secured loan, a bridging loan is secured against whatever assets you choose. This can include the property you aim to purchase, existing property, or vehicles, to name a few. The same risks apply here too, as any assets you put up can be sold to make up the value of the loan, in the event you cannot pay.
  • Vehicle loans: Taking out a loan for a new vehicle is a very common practice, one that will use your existing vehicle or vehicles as collateral. With this kind of secured loan, any vehicle can be purchased, including cars, vans, trucks, and even boats, assuming you have assets of sufficient value. As with any other secured loan, the assets you use as collateral can be seized by your lender if you fail to keep up with repayments.
  • HELOCs: A HELOC, or home equity line of credit, allows you to take out loans against the equity you have in your home. It functions quite like a credit card, allowing you to dip into the loan as and when you need to. As such, you are effectively using your home as collateral, which can constitute a significant risk in the event you cannot repay the loan. In that case, your lender could seize your home to recover what is owed.

What assets can count as collateral?

You’ll often come across the term collateral when reading about secured loans, though it might not always be apparent exactly what is eligible. The short answer is pretty much anything that can be sold, assuming it isn’t illegal, of course. To give you an idea, here are a few examples:

  • Property: This is one of the most common ones, as property can be easily used as leverage to purchase other properties. This can be in the context of using one property to fund the purchase of another for reselling, or a mortgage on a home. Any kind of property can be used as collateral, ranging from land to private dwellings, and industrial warehouses to commercial buildings. Equity in properties you own can also be used.
  • Vehicles: Vehicles are another often used asset, as they are commonly owned and are of a relatively high value. Cars, vans, boats, and so on can be used as collateral, though they often won’t be accepted for property purchases unless they have a particularly high value.
  • Stocks, shares, and other investments: While less common than the previous, investments are an often accepted form of collateral, though one that should be given more thought before using. As these kinds of assets are prone to fluctuating in value, this could cause you problems down the line. Additionally, they are not accepted by every lender.
  • Valuables: Items such as precious metals, necklaces, watches, or other jewelry are perfectly eligible for use as collateral, though lenders may require appraisals or other forms of proof before accepting them.
  • Equipment: Any equipment a business uses, from hand tools to heavy machinery, can be used as collateral, assuming they are owned by the business.

There are plenty of other assets that can be used as collateral, with the above being some of the more widely used asset types. Pretty much anything you can think of can be used as collateral, if it is of sufficient value and you find the right lender.

How to apply for a secured loan

Applying for a secured loan is a fairly easy process, though it pays to do your due diligence. For the most part, you’ll want to treat it as you would any other loan procedure, starting by getting a credit report. Credit reports do not carry nearly as much weight for secured loans, though can still mean the difference between getting your loan or getting your application rejected.

More important is the value of your assets, the appraisal of which you should make your top priority. Secured loan lenders will be much more concerned with what you are offering as collateral than what your credit rating is. Then, as you would with anything else, shop around for the best deal. Some lenders will offer a more competitive interest rate, date of repayment, or simply fit your situation better than others. Once you’ve found your ideal lender, you can put in an application.

Keep in mind that although secured loans emphasise the value of assets over anything else, your credit rating is still important. As we mentioned, it can be the deciding factor between you obtaining your loan or not, but it doesn’t end there. With a poor credit rating, most lenders will close off the loans with the most competitive interest rates. This means that you’ll only be able to obtain secured loans with higher interest rates, giving you the worst of both worlds; much higher risk compared to other types of loans, and a higher bill for your trouble. As such, you should do everything you can to boost your credit rating before taking out a secured loan, or any other loan for that matter.

Should you apply for a secured loan?

This is the burning question. Hopefully, by now you have enough information to answer this question yourself, though if not, there are a few things to bear in mind. First and foremost is the risk. A secured loan is inherently more risky than other loans, as you stand to physically lose something in the event you fall behind on repayments. If your financial situation is especially rocky, you might find a secured loan to be worse than no loan at all, especially if a crucial asset to you is repossessed. Provided you can make your repayments, however, a secured loan could be the perfect way to source the capital you need. If you do your homework and seek professional advice, you’ll find the right secured loan for you in no time.