Secured loans interest rates will depend on factors like the specific type of secured loan, the amount of equity in the collateral, the borrower’s income, and their financial history.
Here, you’ll learn about the types of secured loans, what kinds of interest rates they come with, and how secured loans compare to unsecured loan options. After you have all the facts, you can decide which form of funding works best for you!
What Is a Secured Loan?
A secured loan is a type of funding that requires the borrower to offer collateral. During the terms of the loan, the lender will maintain partial ownership over the collateral and retain the right to seize it should the borrower default on their loan. Usually, loan amounts and other loan details are determined by the amount of equity in the collateral. So, borrowers who can offer collateral with a higher equity are often able to receive higher loan amounts.
Types of Secured Loans
Secured loans come in many different forms, including auto loans, mortgages, home equity loans, and more. According to CNBC, the most common types of secured loans are mortgages and auto loans.1 Check out more information about some of the most popular types of secured loans below.
Auto Loans
Consumers can use an auto loan to finance the purchase of a new or used vehicle. Although auto loans are secured by the vehicle the borrower is purchasing, interest rates and other loan details may depend heavily on their credit score and financial history. Consumers can access auto loans via the car dealership they’re purchasing the vehicle from, a bank, or another direct lender.
Interest rates for auto loans will rely heavily on the borrower’s credit score and financial history, so borrowers with higher scores are going to be able to secure the best rates.
Mortgages
A mortgage is probably the most expensive type of secured loan available. With a mortgage, people are able to finance the purchase of a home using the home itself as collateral. Unlike many other types of secured personal loans, a mortgage often requires a large down payment. According to Forbes Advisor, the average down payment for a house loan is approximately 14.4% of the overall value of the loan.2
Interest rates for mortgages can vary greatly depending on the state of the market and the financial history of the borrower. While borrowers with higher credit scores are going to be able to receive the best rates, there are options like FHA loans that allow bad credit borrowers access to mortgages.
Home Equity Loans / Lines of Credit
A home equity line of credit is another type of secured loan that uses the borrower’s home or real estate property as collateral. Furthermore, borrowers don’t have to have their original mortgage loan paid off in order to qualify for a home equity loan or line of credit; because of this, home equity loans are often referred to as a second mortgage.
Similar to a mortgage, interest rates on home equity lines of credit will also rely on the state of the market and the borrower’s financial specifics.
Secured Credit Cards
A secured credit card gives borrowers access to a line of credit backed up by a security deposit. Typically, the amount of the security deposit will also equal the credit limit for a secured credit card. Unlike a traditional credit card, the credit limit for a secured credit card usually does not renew. For example, let’s say you had a secured credit card with a limit of $200. If you spent $100 one month and paid back $50 of that balance, your credit limit would only be $150 the next month. You wouldn’t have access to your $200 credit limit until you repaid the remaining $50 balance.
Since secured credit cards are popular amongst bad credit consumers, interest rates are often on the higher side. However, as long as you repay the balance on your credit card in full, you won’t have to worry about interest rate charges.
Car Title Loans
Title loans are a type of secured loan that uses the borrower’s vehicle title as collateral. In order to access a title loan, consumers must own their vehicle outright. That means if you are still making payments on your original car loan, you may not be able to qualify for an auto title loan. While some title loan lenders are willing to offer higher loan amounts to cover a borrower’s auto loan, these kinds of deals can make paying off the overall balance extremely difficult.
No matter what type of credit the borrower has, interest rates for car title loans are usually always extremely high. Because of these high rates, title loans are often considered a risky form of funding.
Secured Business Loans
A secured business loan is a type of funding that allows business owners to utilize an asset of their company in exchange for a loan. Common forms of collateral for a secured business loan include a company vehicle, a building, or a plot of land. While business owners can opt for secured or unsecured business loans, they may be able to get higher loan amounts and possibly lower rates when they offer collateral.
What Are the Interest Rates on Secured Loans?
Secured personal loan interest rates often depend upon the amount of equity in the collateral. Usually, the higher the equity, the more favorable rates a borrower may be able to get. However, other factors like the borrower’s income and credit history will also play a role in determining rates, loan amounts, and other loan details.
Secured vs. Unsecured Loan
So what’s the difference between secured personal loans and unsecured loans? The main difference is that secured loans require collateral while unsecured personal loans do not. With an unsecured loan, lenders will refer to the borrower’s credit score and financial history when determining approval, loan amounts, rates, and other loan details. That means borrowers with a poor credit history may have a harder time finding approval for unsecured loans, which is why secured loans are so popular with people who have bad credit.
Why Are Rates for Secured Loans Generally Lower Than Unsecured Loans?
For most secured loans, interest rates and other loan details are determined partially by the amount of equity in the collateral. And since lenders are practically guaranteed repayment for secured loans, they are often willing to offer lower interest rates or more favorable terms. However, that doesn’t mean a secured loan is always the best type of loan to go with. Borrowers should always research multiple lenders and loan types before submitting an application for any type of loan.
A Breakdown of Interest Rates for Secured and Unsecured Personal Loans
| Aspect of Interest Rates | Description |
| Annual Percentage Rate (APR) | The APR represents the annual cost of borrowing and includes both the interest rate and any additional fees or charges associated with the loan. It provides a comprehensive view of the loan’s cost. |
| Fixed Rate | A fixed interest rate remains the same throughout the loan term, offering predictability in monthly payments. |
| Variable Rate | A variable interest rate can fluctuate over the loan term, typically in response to changes in market interest rates. This means monthly payments can vary. |
| Introductory Rate | Some loans offer a lower interest rate for an initial period, which then adjusts to a higher rate for the remainder of the loan term. |
| Compound Interest | Compound interest is interest calculated on the initial principal and also on the accumulated interest of previous periods. It can significantly affect the total amount payable. |
| Interest Rate Cap | For variable-rate loans, an interest rate cap limits how much the interest rate can increase over a specific period or over the life of the loan. |
| Margin | In variable-rate loans, the margin is a set percentage that lenders add to the index rate to determine the actual interest rate charged on the loan. |
| Index Rate | The index rate is a benchmark interest rate (like the prime rate or LIBOR) that variable rates are based on. Changes in the index rate affect the interest rate of the loan. |
| Prepayment Penalty | An unsecured and secured loan will both include a penalty fee if the borrower pays off the loan early. This can affect the cost savings of refinancing or paying off a loan ahead of schedule. |
| Loan Term | The duration of an unsecured or secured loan affects the total interest paid. Longer terms generally mean lower monthly payments but more total interest paid over the life of the loan. |
Disclaimer: This chart is intended for informational purposes only and does not constitute financial advice; borrowers should consult with a financial advisor to understand how these aspects apply to their specific situation.
How To Get the Best Interest Rates on a Secured Personal Loan
Getting the best interest rates on a secured loan all starts with doing your research. Before you apply for a loan, take a look at your finances to see if adding in a loan payment is reasonable for your current financial situation. You can also seek credit counseling if you need some extra help figuring out your finances.
To save money on interest rates and other loan fees, you may want to think about going with a non-loan alternative like using money from a savings account or asking a close friend or family member for a small loan. But, if that’s not an option, it’s important to consider your options. Look at a few different lenders and compare the kind of loan products, interest rates, and repayment terms they have available.
To make your secured loan comparison more efficient, you can use a loan calculator to see how different interest rates and repayment terms will affect the total cost of your loan. You can even talk to different loan agents and possibly leverage loan offers from one lender to get a better deal from another lender!
FAQ: Types of Secured Loans
Economic conditions play a significant role in determining interest rates for secured personal loans. Central banks, like the Federal Reserve in the United States, adjust base interest rates to manage economic growth and inflation. Interest rates may rise when the economy is strong to prevent overheating and inflation. Conversely, rates may be lowered in a weaker economy to encourage borrowing and investment. Therefore, the interest rates on secured personal loans can fluctuate based on overall economic conditions and central bank policies.
Yes, it’s often possible to negotiate a lower interest rate on a secured loan, especially if you have a strong credit history, stable income, and substantial equity in your collateral. Lenders are sometimes willing to adjust terms to secure your business, particularly if you present offers from other lenders as leverage. However, success in negotiation can vary by lender and your financial situation. It’s always worth discussing with your lender to see if there’s room for more favorable terms.
Yes, the type of collateral you offer can affect the interest rate of your secured loan. Lenders assess the risk associated with the secured loan partly based on the collateral’s value and liquidity. High-value and easily liquidated assets (like real estate or a late-model car) may secure lower interest rates because they present less risk to the lender. On the other hand, assets that depreciate quickly or are harder to sell (like boats or recreational vehicles) might result in higher interest rates due to the increased risk to the lender if the secured loan defaults.
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