Secured Loan
A secured loan is a loan that is backed by collateral, meaning the borrower pledges an asset to the lender as security for repayment.
Collateral is something of value that is used to guarantee a loan. If the loan is not repaid, the lender may take the collateral to recover the money owed.
If the loan is not repaid, the lender may take the asset used as collateral.
Why it matters
Secured loans typically allow borrowers to access larger amounts of money or lower interest rates because the lender has reduced risk.
Because an asset is attached to the loan, there is a higher level of accountability for repayment.
Understanding collateral helps clarify what is at risk when taking out certain types of loans.
Everyday application
Secured loans are commonly used for:
Auto loans (car is collateral)
Mortgages (home is collateral)
Secured personal loans (cash deposit or savings account used as collateral)
Collateral can include assets such as:
Vehicles
Homes or real estate
Cash deposits in a secured account
Savings accounts or certificates of deposit (CDs)
Repayment terms are set in advance, and failure to repay can result in the lender taking the collateral used to secure the loan.
Key takeaway
A secured loan is backed by an asset called collateral, which reduces lender risk but increases consequences if repayment is not made.