Typically, personal loans are loans that are issued entirely based on the borrower’s creditworthiness. The borrower can use the loan funds for whatever they want, and the bank cannot “repossess” an item if the borrower fails to make payments.
However, in some cases, banks will issue “secured” personal loans. These are loans backed by collateral such as a car, an RV, a motorcycle, or even a CD filled with money.
We’ve got everything you need to know about secured personal loans below.
Pros of Secured Personal Loans
Lower Interest Rates
Because the loans are secured or backed by an asset, rates on secured loans tend to be lower than those on unsecured loans.
They Tend to Be Easier to Get
If you’ve got poor or limited credit, a secured personal loan may be easier to get than an unsecured personal loan.
They Help You Build Credit
Some secured personal loans are considered “credit-builder loans.” These are loans with low interest rates that allow you to make payments over a period of time. Since the loans are backed by a savings account, the bank takes on very little risk. Meanwhile, you can build your credit.
Personally, I don’t like credit-builder loans. There are better ways to build credit when you don’t have much credit history.
Cons of Secured Personal Loans
You Could Lose Your Collateral
If you fail to make timely payments on your loan, you could lose your collateral.
Less Expensive Options May Be Available
Secured personal loans may be loans with low interest rates, but they aren’t always the best. Sometimes, you can find better rates by using a promotional credit offer with 0% APR or by taking advantage of subsidized or unsubsidized student loans.
Since student loans can be used to cover living expenses, it is legitimate to use student loans rather than personal loans if you’re running out of money. Of course, the option of not borrowing money at all is the cheapest option.
Are You a Good Candidate for a Secured Personal Loan?
Although secured personal loans are less expensive than unsecured personal loans, I’m hesitant to suggest that you take one out. In most cases, personal loans are used for wants rather than needs. Generally, it makes a whole lot more sense to try to earn extra money to pay for these wants.
However, there are a handful of situations where a young person might absolutely need to borrow money, and in those cases, a secured personal loan could be the lowest-cost way to do it.
The first thing that comes to mind is to pay for relocation expenses. Let’s say you graduated from school in Missouri, and you have a great job offer in the Bay Area. But before you start, you need to cover three months’ worth of rent (first, last, and deposit). Even though you’re living with three other roommates in a two-bedroom apartment, you’ll still need $2,400 to cover your share of the rent. On top of that, you need to cover a U-Haul rental which runs another $1,000.
If you can’t cover these expenses out of your savings, you’ll need some form of credit to cover them. And that may mean using your paid-off Toyota Camry to back your loan. Assuming all goes well with the new job, you’ll have the loan paid off within a few months.
The other time to consider a secured personal loan is when you’re facing an absolute crisis. Maybe you need money to pay for life-saving medicine. Maybe your ex is late on child support, and you have to pay for day care or your child will lose his spot. If you’ve explored other options, and you’ve cut back where you can, you may end up needing to borrow money. In those cases, a secured personal loan could be better than a credit card.
However, I will caution you that it rarely makes sense to use a CD to back a personal loan. If you have the money available, plan to use it for your necessary expenses.
Where to Get a Secured Personal Loan
There are a lot of places you can get a secured personal loan. Check out our list of the best online personal loan lenders here.
You can also check out this list:
Backed by a Vehicle
- OneMain Financial: Borrowers with paid-off cars may be able to use their vehicle to secure a loan from OneMain Financial. Rates on these loans range from 18% to 35.99% which is a relatively high rate (especially for a secured loan).
- Finova Financial: Finova is essentially an online title lender. You’ll use your car to back the loan. Loans from Finova have a maximum interest rate of 30% and payback periods of one year. Finova is currently operating in Arizona, California, Florida, New Mexico, South Carolina, and Tennessee.
Backed by a Savings Account or CD
- Digital Federal Credit Union: There are credit-builder loans with a 5% APR. The loan term is 24 months.
- Navy Federal Credit Union: Take out a loan without drawing down from your savings. The rate is your “share rate” (the rate you earn on your savings) plus 2% (for loans under 60 months).
- America First Credit Union: These loans are available for your CD rate plus 3%. The loans last through the term of your CD.
- First Tech Federal Credit Union: These loans are available for your CD rate plus 3%. Borrow up to $500,000.
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.