What happens if I default on a secured loan?

If you default on a secured loan, the lender has the legal right to seize the collateral you pledged. For example, with a home equity loan, the lender could foreclose on your home; with an auto loan, they can repossess the vehicle. Defaulting can also damage your credit score and result in additional fees. It is important to contact your lender if you are struggling to make payments, as some may offer forbearance or restructuring options.

Can I get a secured loan with bad credit?

Yes, secured loans are often easier to qualify for with bad credit because the collateral reduces the lender's risk. However, your credit score still influences the interest rate and APR you are offered. Borrowers with lower credit scores may face higher rates or shorter loan terms. Some lenders specialize in secured loans for borrowers with poor credit, but you should compare offers and ensure the monthly payment is affordable.

What assets can be used as collateral for a secured loan?

Common assets used as collateral include real estate (homes, land), vehicles (cars, trucks, motorcycles), savings accounts, certificates of deposit (CDs), stocks or bonds, and valuable jewelry or collectibles. The lender will appraise the asset to determine its value and the maximum loan amount. Not all lenders accept every type of collateral, so it is best to ask about acceptable assets before applying.

Secured Loan Guide: What Is a Secured Loan?

Updated 2026-09-05 · By Michael Chen, CPA

Learn what a secured loan is, how collateral affects your interest rate and APR, and key factors like credit score and loan term. Compare options wisely.

A secured loan is a type of borrowing that requires the borrower to pledge an asset—such as a home, vehicle, or savings account—as collateral. Because the lender holds a claim on that asset, secured loans generally offer lower interest rates and APRs compared to unsecured loans, but they carry the risk of losing the collateral if you fail to make payments. This guide explains how secured loans work, common types, and what you should consider before applying.

How a Secured Loan Works

When you take out a secured loan, the lender places a lien on the asset you offer as collateral. This lien gives the lender the legal right to seize the asset if you default on the loan. The loan amount is typically based on the appraised value of the collateral, and the lender will evaluate your credit score, income, and debt-to-income ratio to determine the interest rate and loan term. Because the collateral reduces the lender’s risk, you may qualify for a larger loan or a lower monthly payment than you would with an unsecured loan. However, the loan term can vary from a few months to several years, depending on the type of loan and the lender’s policies.

Common Types of Secured Loans

Secured loans come in several forms, each designed for a specific purpose. The most common types include:

Home equity loans and lines of credit (HELOCs) – Use your home as collateral, often for home improvements, debt consolidation, or major expenses.
Auto loans – The vehicle you purchase serves as collateral; if you default, the lender can repossess the car.
Secured personal loans – Backed by a savings account, certificate of deposit, or other liquid asset.
Mortgages – A home purchase loan where the property itself is the collateral.

Pros and Cons of Secured Loans

Before choosing a secured loan, it’s important to weigh the advantages and disadvantages. As a general rule, secured loans can be a useful tool for borrowers who need a larger amount or have a less-than-perfect credit history, but they also involve significant risk.

Pros	Cons
Lower interest rates and APR compared to unsecured loans	You risk losing your collateral if you default
Higher borrowing limits possible	Longer loan terms may mean more interest paid over time
Easier approval for borrowers with lower credit scores	Application process can be more involved (appraisal, paperwork)
Fixed monthly payments simplify budgeting	Some lenders charge origination fees or prepayment penalties

Key Factors to Consider Before Applying

Every borrower’s situation is different, so it’s wise to evaluate your own finances and goals. The following factors commonly influence the cost and suitability of a secured loan:

Your credit score – While secured loans are more accessible, a higher score can still unlock better rates and terms.
Loan-to-value ratio – Lenders typically limit the loan amount to a percentage of the collateral’s value (e.g., 80% for a home equity loan).
Interest rate and APR – Compare the annual percentage rate, which includes fees, to understand the true cost.
Loan term – Shorter terms mean higher monthly payments but less total interest; longer terms lower the monthly payment but increase total interest.
Monthly payment – Ensure the payment fits comfortably within your budget, considering other debts and expenses.
Repayment flexibility – Check if the lender offers grace periods, payment deferrals, or options to refinance if needed.

Remember, this is general educational content and not financial advice. Always read the loan agreement carefully, ask your lender about any fees, and consider consulting a financial professional before committing to a secured loan. By understanding how collateral, interest rates, and loan terms interact, you can make a more informed decision that aligns with your financial situation.

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