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Most personal loans are unsecured, meaning you don’t need to put up any type of collateral to get the loan. However, if you can’t qualify for an unsecured loan, some lenders will offer you a secured personal loan. We took a look at popular places to get secured personal loans — including banks, credit unions and online lenders — as well as other options for you to consider.
What is a secured personal loan?
Many banks and credit unions offer secured personal loans, which are personal loans backed by funds in a savings account or certificate of deposit (CD) or by your vehicle. As a result, these loans are sometimes called collateral loans.
There is frequently no upper limit on these types of loans. Rather, the maximum amount you can borrow may be based on the amount of collateral you are willing to put up. If you fail to repay the loan as promised, the bank can seize your collateral (e.g., the funds in your deposit account) to recuperate their losses.
Secured personal loans from banks and credit unions
If you’re thinking about getting a secured loan, here are some of the banks and credit unions that offer them:
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How much do secured personal loans cost?
Interest rates vary widely from lender to lender, and are based on your creditworthiness. However, because these loans are secured, they typically feature lower interest rates across the board when compared to unsecured personal loans.
Terms on secured personal loans may also be longer — sometimes up to 10 years. If you secure your loan with a CD, the maximum repayment term may be the term of the CD itself. Every bank and credit union will have different sets of rates, terms and fees for their secured personal loans.
When you’re researching secured loans online, many lenders will let you check your rate before you fill out a formal application. This makes it easier to shop around and find a good deal (plus, if you’re looking for secured loans for bad credit, rate shopping may be especially important). Comparing multiple loan offers has the potential to save you a significant amount of interest in the long run.
Other ways to secure financing
If you don’t think you could qualify for an unsecured personal loan but are having trouble finding a secured loan, we’ve done some research on other loan options and strategies you could use.
Consider a cosigner
You can get a loan with bad credit, but you may find few offers to choose from, and they’re liable to have unaffordable interest rates. However, you could seek out a cosigner for your loan. A cosigner, especially one with excellent credit, could improve your chances of getting approved and receiving a good interest rate. Many banks and online lenders allow cosigners or co-applicants on their personal loans.
Still, like securing your loan, having a cosigner is not without its risks. The biggest risk lies primarily with your cosigner, who’s putting their personal credit on the line for you. If you pay the loan late, it may damage both of your credit reports. And even if you pay on time, your friend or family member may have trouble qualifying for financing in the future due to the increased debt on their credit report.
Tap into your home’s equity
Home equity loans allow you to borrow against the value you’ve built up in your home. For example, if you have a $100,000 mortgage on your house and you’ve paid off $40,000, you could borrow against the $40,000 in equity you have on your home. With home equity loans, you can typically borrow money even if your mortgage is not yet paid in full.
When you use your home as collateral to secure a loan, you need to be aware that your lender can foreclose on the property if you don’t make payments. And if you do decide to get a home equity loan, make sure you use a reputable lender; a regional bank, credit union or well-known online lender may be good options to consider. Working with a reputable lender should ensure that you get fair rates and terms.
Take out a 401(k) loan
When you need fast access to cash, a 401(k) loan gives you the option to borrow against your retirement savings. In general, you can borrow up to 50% of your vested account balance up to a maximum of $50,000. If your vested account balance is under $10,000, however, you may be able to tap into the full amount available (up to $10,000). It’s also worth noting that 401(k) loans feature market interest rates, similar to what a lender would charge for a similar loan) — but they too are not without risks.
In the event you don’t repay the funds you borrowed, plus interest, you may have to count that money as a distribution. And if this happens, you may have to add any funds you previously didn’t pay taxes on to the gross income figures on your tax refund (for the tax year during which the distribution takes place). Translation: It might look like you earned more money and that could affect how much money you owe the IRS that year.
Failing to repay your 401(k) loan comes with other harsh consequences as well. If you haven’t reached retirement age (59 and ½) and you don’t qualify for an exemption, you may owe the IRS an early withdrawal penalty. The amount of this penalty equals 10% of your taxable distribution.
Borrow from friends or family
Another option you may want to consider if you need to borrow money is to get a loan from a family member or friend. You might be able to negotiate a much lower interest rate with your family or friends than you could with a bank or online lender.
If you decide to go this route, it’s a good idea to write a formal loan contract and even get a third party to administer the loan. Keep in mind that there may also be tax implications for the family member or friend making the loan.
It’s also important to remember that loans from loved ones aren’t risk-free. No, your friend or family member might not be able to seize your assets in the event you don’t pay them back as promised. But the cost of a damaged personal relationship could be much higher than any monetary consequence you might face from a lender.
Avoid predatory loans
We strongly advise borrowers to avoid auto title loans, cash advances, no credit check loans and payday loans. These types of loans come with very high interest rates, exorbitant fees and, in some cases, extremely short payback schedules.
With a predatory loan, it can be all too easy to fall into a debt trap. For example, a no credit check loan may come with an APR of 160%. On a two-year $5,000 loan, this means you would repay over $16,000 — over three times the value of the loan.