With your typical unsecured loan, the only guarantee a lender has that you’ll repay the money is your word — and the threat of a lawsuit.
In many circumstances, lenders are just fine with that, especially if you’ve got a solid credit score to prove you’re a responsible borrower. But if your credit is shaky, or you want a big loan at a low interest rate, lenders may not be willing to take the risk.
To show the lender you’re serious about repaying the money, you can put up one of your assets as collateral. You’re saying, “If I don’t pay you back on time, take this thing instead.”
Read on to learn more about how secured loans work, the different types that are available and what you’ll need to do to get one.
How does a secured loan work?
Secured loans include mortgages, auto loans, some personal loans and even some credit cards.
The common trait of all secured loans is collateral. It’s the “stuff” that you have to put on the line, assuring the lender that even if you fail to repay your loan, they won’t come out empty-handed.
The collateral might be your house or your car. Or you may have to put up your savings. Something valuable it would hurt you to lose.
Collateral is why you can often get a secured loan even if you’ve got bad credit or are just starting out and don’t have much of a credit history to show.
When you take out a secured loan, the lender will put a lien — a legal claim — on your asset, which they can cash in if you fail to repay them.
In the event that you don’t pay back your loan, the lender will sell off your asset in order to recoup their losses. If your asset doesn’t fully cover the amount of your loan, you’ll still be required to make up the difference.