A secured personal loan is backed by collateral. The collateral is typically an asset that could be taken by the lender and used to repay the loan in the event the borrower stops making payments.

The two types of personal loans

Personal loans can be secured loans (sometimes called collateral loans) or unsecured. Each type has its own unique pros and cons.

How a secured personal loan works

To secure a personal loan, you must prove ownership of a valuable asset (like a house or car) that can be used as collateral to guarantee repayment of the loan. The use of collateral protects the lender against loss because they can seize the asset if you stop making loan payments. Because secured personal loans are less risy for the lender, you might be offered lower interest rates, better terms, and a higher maximum loan amount.

Unsecured personal loan

An unsecured personal loan does not require an asset to guarantee repayment. These types of loans often have higher interest rates and lower max loan amounts than secured loans because there’s more risk the lender might not be repaid.

Common types of secured personal loans

Title loans

When you use a vehicle you already own as collateral for a personal loan, it’s called a title loan or car title loan. The lender puts a lien on your car and can repossess it if you don’t make your loan payments.

Title loans are a more common option for borrowers with low credit scores. Car title loans are typically offered by alternative lenders and come with high interest rates, and costly fees.

Car title loans are also generally short-term loans with payment schedules that range from three months to three years. Depending on your lender and the appraised value of your car, you may be able to borrow up to $15,000 with a title loan.

Pawn loans

Offered by pawnbrokers, these loans have short terms (typically not longer than several months). The amount you can borrow with a pawn loan is based on the value of the item you provide as collateral, such as jewelry, electronics or an antique.

Because pawn loans are generally for people who can’t get a personal loan from a bank or online lender, they may have extremely high interest rates, with APRs of up to 200%.

Car loans

Unlike a car title loan, where an existing car is used as collateral for a personal loan that can be used as you see fit, a car loan uses the vehicle you’re buying as collateral against non-payment of the loan (much like the way a mortgage works—where the house you buy is the collateral for the loan). In either case, if you fail to make payments, the lender can seize your car.

Pros and cons of a secured personal loan

Pros

You are likely to be offered lower interest rates, which can help you save a significant amount of money over the life of the loan.
Because the lender has an asset to seize if you default on your payments, secured loans may come with higher borrowing limits.
You have a better chance of approval because collateral protects the lender against loss.

Cons

Because the value of the asset you’re using as collateral must be verified, it often takes longer to get approved for a secured loan.
You’ll likely have to pay additional fees, like appraisal costs.
You risk losing your collateral — like your car or valuables — you default on the loan.

The main disadvantage of a secured loan is that you must provide an object of value as collateral and you risk having that object seized if you miss any loan payments.

Rates vary widely based on things like your lender and your credit score, but the amount can be tens of thousands of dollars and is generally more than you could borrow with an unsecured loan.