Secured Loan: What It Is, How It Works, & How To Get One

Everything You Need to Know About Using Collateral to Secure a Loan and Improve Your Chances of Approval

When you need a loan, your credit score can be a major roadblock. That’s where secured loans come in handy. Secured loans vary from unsecured loans, which rely heavily on your credit history. A secured personal loan is backed by something you own, like a car, home equity, or savings account. Because the lender has that collateral as security, they’re often more willing to approve your application, even if your credit isn’t perfect. 

You might also score a lower interest rate and a larger loan amount. But before jumping in, it’s important to understand how secured loans work, what you can use as collateral, and the risks involved, like losing your asset if you can’t repay. 

So let’s take a look at what a secured loan is and how it works, so you can decide if a secured loan is the right move for your financial situation.

What Is a Secured Loan? 

A secured loan is a type of loan that’s backed by collateral, something valuable you own, like a car, home equity, or even a savings account. The idea is simple: if you can’t repay the loan, the lender has the legal right to take the asset to recover the money. 

Because of this added security, secured loans are usually easier to get approved for, even if your credit isn’t great. They also tend to offer lower interest rates and higher loan limits than unsecured loans. This makes them a great option if you’re trying to borrow a larger amount or want more affordable monthly payments. 

Of course, there’s a risk involved; you don’t want to lose your asset if something goes wrong. But for many people, a secured loan can be a smart financial move, especially when handled responsibly. 

How Do Secured Loans Work? 

Secured loans follow a pretty straightforward process, but it’s important to know what to expect. 

Choosing Your Collateral

The first step in getting a secured loan is selecting what you’ll use as collateral. This could be your car, home equity, savings account, or even investments, depending on the lender. The collateral should be something of value that the lender can legally claim if you default. It needs to be owned outright (or have enough equity in it), and documentation will be required to prove ownership. In terms of choosing the right collateral, it should be valuable enough to secure the amount you want to borrow, but not something you’re unwilling to risk. 

The Loan Approval Process

Once you’ve chosen your collateral, the lender evaluates both your assets and your financial profile. They’ll look at your income, credit history, debt load, and the value of the collateral itself. If everything checks out, you’ll be approved and offered loan terms, including interest rate, loan amount, and repayment schedule. Before the funds are released, the lender will typically register a lien against your asset, which is a legal claim allowing them to seize and sell it if you fail to repay the loan. 

Repayment and Risk

Secured loan repayments work much like any other loan; you’ll pay it back in fixed monthly installments, usually with interest. The length and size of payments depend on the loan terms and the amount borrowed. As long as you make payments on time, your asset remains untouched, and once the loan is paid off, the lien is removed. But if you miss payments or default entirely, the lender can legally take your collateral and sell it to recover their money. 

Common Types of Secured Loans and What You Can Use as Collateral

Secured loans come in different shapes and sizes, and so does the collateral you can use. The most common type is a car loan, where the vehicle you’re buying serves as the collateral. Similarly, a mortgage is a secured loan backed by the home itself. Then there are home equity loans and home equity lines of credit (HELOCs), which let you borrow against the value of your home. 

You can also find secured personal loans that use other assets, like a paid-off vehicle, cash savings, or even investments, depending on the lender. Some lenders even allow you to use jewelry or valuable equipment as collateral.

Here are common forms of collateral you might use:

• A vehicle (new or paid off)
• Home equity or real estate
• Cash savings or GICs
• Investment accounts
• Jewelry, tools, or valuable equipment

The type of loan you choose often depends on what asset you’re comfortable putting up as security. You should keep in mind that whatever you use as collateral is at risk if you fall behind on payments, so be thoughtful about what you give up and why.

Pros and Cons of Taking Out a Secured Loan

Secured loans have real advantages, especially if you’re rebuilding credit or need to borrow more than what an unsecured loan offers. The interest rates are often more affordable, and lenders are more flexible with approval. But the risk is real; if you can’t make payments, you could lose your house, car, or savings. That’s why it’s important to borrow responsibly, stick to your budget, and fully understand the loan terms. 

How to Qualify and Apply for a Secured Loan in Canada

Qualifying for a secured loan in Canada is usually more straightforward than securing an unsecured loan because the collateral reassures lenders, even if your credit score is shaky. Even still, preparation matters. You should start by choosing an asset you’re willing to pledge, then shop around for reputable banks, credit unions, or online lenders to compare rates and fees. 

During the application, you’ll need to show you can repay the loan and prove you actually own the collateral. Once the lender verifies your documents and appraises the asset, they’ll issue an offer. If you accept, they place a lien on your property until the loan is fully repaid. 

Key steps to qualify and apply:

• Pick your collateral: Car title, home equity, savings, or another valuable asset you own outright.

• Research lenders: Compare interest rates, fees, and borrower reviews from banks, credit unions, and trusted online platforms.

• Gather documents: Photo ID, proof of income, recent bank statements, and ownership paperwork for the collateral.

• Apply: Provide personal details and authorize a credit check; many lenders offer quick online forms.

• Asset appraisal & lien: Lender confirms the collateral’s value and registers a legal claim until the loan is paid off.

• Review the offer: Check interest rate, repayment schedule, and any penalties before signing, and ask questions if anything’s unclear.

Secured loans can be a powerful financial tool, and by using an asset you already own as collateral, you increase your chances of approval. But it’s not a decision to take lightly. The biggest risk is losing your asset if life throws you off track and you can’t repay. That’s why it’s crucial to borrow only what you need, understand the loan terms, and choose a lender you trust. With the right approach, a secured loan can not only solve short-term money problems but also support long-term financial growth.