Secured Loan
A secured loan is backed by collateral — an asset the lender can claim if you default. Common secured loans include mortgages (collateral: your house), auto loans (collateral: your car), and pawn loans (collateral: the pawned item). Because the collateral reduces the lender's risk, secured loans typically have lower APRs than unsecured loans of the same amount.
Secured loans are the older form of consumer lending. Before unsecured personal loans became common, most consumer credit was secured by something: a car, a house, a piece of jewelry. The collateral served as the lender’s protection: if you didn’t pay, they took the asset.
Common secured loan types
- Mortgages: secured by the house being purchased. APR typically 6-8% for prime borrowers.
- Auto loans: secured by the vehicle being purchased. APR typically 5-12% for prime, 15-25% for subprime.
- Title loans: secured by your existing car title. APR typically 100-300%. Common in some states; risky because losing the loan means losing the vehicle.
- Pawn loans: secured by an item left at the pawnshop. APR often 120%+ but for very short terms.
- Share-secured loans: secured by funds you have on deposit at a credit union. APR typically under 10%. Useful for credit-building.
- Home equity loans / HELOCs: secured by your home’s equity. APR typically 6-12% but with the risk of losing your home.
When secured loans make sense
If you have an asset to pledge that you don’t need access to (or can replace), secured loans usually offer better rates than unsecured alternatives. Share-secured loans through credit unions are particularly underrated for credit-building purposes.
The flip side: defaulting on a secured loan means losing the collateral. For title and pawn loans specifically, the collateral often matters more than the loan itself: losing your car for a $1,000 loan can cascade into bigger problems.