If you’re familiar with personal loans that require nothing but your good credit and a signature, you may be wondering, what’s a secured personal loan?
With many types of personal loans, funds are provided through a signatory or unsecured loan. The interest rate payments are typically reflective of the credit rating of the individual borrower.
For those with poor credit, these loans may not be available at all. For this group, there’s another option: secured personal loans.
A secured loan involves the borrower putting up collateral against the funds advanced to them. The lender then has the option of taking possession of the collateral if the repayment terms are not met. A potential downside is that if the sale of the collateral does not cover the amount due, the lender can go to court and obtain a deficiency judgment requiring the borrower to pay off the difference.
Secured personal loan terms typically carry more favorable interest rates, primarily because the creditor is not taking the same level of risk as they would with an unsecured loan. By taking out secured loans and making timely payments, an individual can rebuild their credit score.
If you are using the loan as part of a credit rebuilding process, then it is important to make all payments on time and meet all the loan terms. Over time, these on-time payments will contribute positive information to your credit report.
Another point to remember is that credit will heal over time. Negative items typically fall off after seven years, and even bankruptcies come off of your credit report after ten years. So by making your timely payments as negative items fall off your credit history, they are replaced with positives.
Secured loans can sometimes be a better option for those with a lower credit score, as they can enjoy the benefits of a lower interest rate payment then they would have with an unsecured or payday loan.
There are several types of secured loans, such as auto loans, mortgages and title loans. Collateral can include just about anything of value, from your home to your vehicles.
Savings accounts or certificates of deposit (CDs) can also be used as collateral, but the funds within these are typically frozen until the loan is paid off. So if you’re using your savings account as collateral for a loan, understand that those funds will not be available for emergencies or other expenses during the life of the loan.
Others have taken secured loans, such as second mortgages on their homes, to pay off high-interest unsecured debt. However, if you default on the payments for the secured loan, you can lose the collateral. It is better to work on paying off the high-interest unsecured debt by means of budget adjustments and other options.
Secured loans backed by your car or truck are based on your vehicle’s value, which depends the year, make and model and how many miles are on the odometer. Lenders will put a lien on your vehicle when you borrow against it, ensuring that they are paid first if the car is sold.
Interest rates for vehicle title loans are typically higher than the loans available through your bank or credit union. You may be able to save on interest payments by prepaying the loan. But confirm there is no prepayment penalty built into your loan terms.
Many of these loans, such as one from TitleMax, require proof of income and a clear title. Credit checks are not generally part of the process.
Overall, secured personal loans are a way to borrow necessary funds at a lower interest rate than an unsecured loan, especially if you are rebuilding your credit score.
Credible is a marketplace where lenders including Avant, LendingClub, PAVE, Prosper and Upstart compete for your business. You can compare personalized offers from multiple lenders on Credible.com without sharing your personal information with lenders or affecting your credit score. Tracy Sherwood-Knepple is a business and finance writer. She holds a degree in mass communications from Indiana University.