Erinn Dimond, WalletHub Writer
@Erinn.dimond
A secured personal loan is a good idea if you have a low credit score, you’re sure you can repay the loan on schedule, and you own an asset that is worth at least as much as the loan you want. Putting up collateral to secure your loan can make it easier to get approved when you have a low score. It should also result in a lower interest rate than you’d get otherwise. However, you could lose your collateral if you don’t pay the bills.
Personal loans are somewhat unique in that you may have a choice between secured and unsecured options. Other common types of secured loans are mortgages and auto loans, which are automatically secured by the house or car you’re purchasing. Only one of the 10 biggest banks in the U.S. offers secured personal loans, so you may need to consider offers from online lenders.
When to Avoid a Secured Personal Loan
- You might default. If you’re not certain you can pay back your loan, think twice about putting up collateral for a secured loan. You might end up losing your collateral, in addition to damaging your credit score, if you default on the loan. Defaulting on a loan can damage your score for years to come, and getting property repossessed can worsen the impact.
- You have a good or excellent credit score. Having a higher credit score increases your likelihood of getting approved for a loan and can help you get a lower interest rate. If you can qualify for a lower APR on an unsecured loan, going with that option will reduce your risk since unsecured loans won’t take your collateral if you default.
- You need a loan quickly. If you’re in a hurry, you may need to consider other options. Secured loans can take longer to fund because the lender has to verify the value of your pledged asset. That said, using a savings account as collateral may help speed up the process since the cash value is immediately clear to the lender.
If a secured loan isn’t right for you, consider a 0% APR credit card, an unsecured loan that allows joint applicants or co-signers, or borrowing from friends and family. Keep in mind that you’ll need good credit to be approved for most 0% APR credit cards.
Other Types of Secured Loans
Like with secured personal loans, it’s only a good idea to get an auto loan or mortgage if you are confident that you can make the monthly payments on time. After all, you risk losing the house or car if you default. Make sure to compare lenders, shop around for deals, and get prequalified to find the best offer.
To learn more, check out WalletHub’s guide to secured personal loans. You can also compare mortgages and car loans right here on WalletHub.
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