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 go over everything you need to know about secured loans, in order to make an informed decision.

What is a secured loan?

A secured loan is secured against physical assets, which are known as collateral. By putting up assets as collateral, loans of greater value can be made available, determined by the value of the assets you present. Once you put up assets as collateral, your chosen lender will then put a lien against that asset. Which is a claim over it in short. This claim will last until you repay the loan, or default on it. Which will result in your collateral assets being repossessed. This does make a secured loan a riskier option, though one balanced by flexibility. Secured loans do not usually place as much emphasis on credit scores, making them available to people with a poor credit history. That, along with the potential for sizable loans, can make a secured loan the perfect fit, if you can sustain the risk.

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.
  • 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.

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.
  • Vehicles: Vehicles are another common asset, as they are commonly owned and are of a relatively 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.
  • 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.

How to apply for a secured loan

Applying 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 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.

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. 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.