Understanding Secured Loans: What They Are & How They Work

Every loan comes with a certain amount of risk for both the lender and the borrower. With secured loans, a significant share of that risk is offset by collateral, an asset the lender can claim if the borrower defaults. 

That added security often translates into stronger borrowing power. Compared with unsecured financing, secured loans may offer lower interest rates, larger loan amounts, or more flexible terms, giving borrowers access to capital that better supports business and investment growth.

For real estate investors, secured loans are a common financing tool. They allow borrowers to leverage existing assets—including real estate and other high-value holdings—to finance acquisitions, renovations, operating needs, or expansion opportunities. 

In this article, we’ll break down what a secured loan is, how it works, and what investors and business borrowers should evaluate before moving forward.

What Is a Secured Loan?

A secured loan is a loan backed by collateral. Collateral is an asset that the lender can seize and sell if the borrower fails to repay the loan as agreed.

By tying financing to a tangible asset, lenders reduce their exposure to risk. In turn, that may allow them to extend more favorable terms or extend financing to borrowers who might not qualify for funding based on a credit profile alone. For real estate investors, property is one of the most common forms of collateral, though lenders may also accept other business or personal assets, depending on the lender and loan structure.

You may also hear secured loans referred to as “collateral loans,” as the borrower must pledge an asset to obtain financing.

Secured Loans vs. Unsecured Loans

The main difference between secured and unsecured loans is collateral. Secured loans require the borrower to pledge an asset. Unsecured loans do not. 

Instead, unsecured financing relies primarily on the borrower’s credit history, income, cash flow, and overall financial profile.

Because unsecured loans are not backed by collateral, they often come with higher interest rates, lower borrowing limits, and tighter approval standards. If a borrower defaults, the lender does not have immediate rights to a specific asset, which increases the lender’s risk and impacts their ability to recover losses.

Both loan types serve an important purpose, but the best option for funding needs depends on the borrower’s goals, circumstances, and the purpose of the loan.

Most credit cards and many personal loans are unsecured. An unsecured loan may be a good fit when:

• You have limited tangible assets or do not want to put them at risk
• You need funding quickly
• You want flexibility in how funding is deployed without tying up your existing assets

A secured loan may be a better fit when:

• You need a large amount of capital for your business or project
• You want lower interest rates or smaller monthly payments
• You want to use existing assets to strengthen your financial position
• You have bad or limited credit history but strong assets

For many investors, secured loans provide the scale of funding needed to acquire or improve investment properties, allowing for growth.

How Secured Loans Work

When a borrower applies for a secured loan, they pledge a specific asset as collateral. The lender then places a lien, or claim, on that asset.

A lien gives the creditor the legal claim to the collateral, including the right to seize or sell the asset if the borrower does not meet their repayment obligations.

Most secured loans are structured as installment loans, meaning that the borrower receives all funds upfront. Installment loans are repaid over time through scheduled payments that include principal and interest. 

Interest rates on secured loans are typically fixed, though some loan types may use variable rates. Loan repayment lengths can vary widely by loan type, with some options as short as 12 months or as long as 30 years.

What can be used as collateral for a secured loan?

In some cases, the type of loan determines the collateral required. With a mortgage, for example, the property being financed typically serves as the collateral securing the loan.

In other cases, borrowers may pledge existing assets to access capital for business or investment purposes. For example, an investor may use an existing property, equipment, or financial account to secure financing for another project. 

Assets commonly used as collateral for investments include:

• Real estate: primary residences, rental properties, or other investment properties
• Vehicles: cars, boats, RVs or other vehicles
• Financial assets: savings accounts, investment accounts, or insurance policies
• Business assets: inventory, machinery, or equipment
• High-value personal property: jewelry, collectibles, or other valuable items

Using an asset as collateral can affect how that asset can be used during the life of the loan. In some cases, the borrower could be restricted from selling or transferring the asset until the loan has been fully repaid.

Risks and Benefits of Secured Loans

Because collateral reduces lender risk, secured loans often come with lower interest rates, higher borrowing limits, and more accessible funding than unsecured financing. For early-career investors with limited credit history or lower credit scores, secured loans may also increase the chances of approval.

However, using collateral does not automatically guarantee a lower interest rate, or even approval. Borrowers with lower credit scores may still be considered high risk, facing high rates or denial of credit. If the borrower fails to repay the loan according to the agreed terms, the lender may also take ownership of the collateral used to secure the loan.

Before applying for a secured personal loan or other secured debt, borrowers should carefully evaluate whether they can meet the repayment obligations and schedule—and whether the projected return justifies the risk to the pledged asset. For most real estate investors, that means weighing financing costs against the expected performance of the property or project.

Types of Secured Loans for Investors

Below are some of the most common individual and business loans used by real estate investors.

Secured Individual Loans for Investors

Individual investors often use secured loans to finance real estate purchases, renovations, or other project-related expenses. In many cases, the asset being financed—such as an investment property—also serves as the collateral. 

For example, mortgages are commonly used to purchase rental or investment properties, while home equity loans and home equity lines of credit (HELOCs) allow borrowers to tap into existing property equity to fund renovations, property improvement projects, and other cash needs. 

Some individual investors may also use secured personal loans when they need access to capital and have qualifying assets to pledge. However, loan structure, pricing, and eligibility can vary widely depending on the lender, the borrower’s credit profile, and the intended use of funds.

Common secured loan types for individuals used by investors include:

• Investment property mortgage
• Secured personal loan
• Home equity loan or HELOC
• Life insurance loan
• Share-secured loan

Secured Business Loans for Investors

Secured business loans are a core financing tool for companies and real estate investors that need capital for acquisitions, renovations, cash flow management, or short-term opportunities. 

Depending on the lender and structure, collateral may include business real estate, investment properties, equipment, inventory, or other business assets. In some cases, lenders may also require a personal guarantee, meaning that the business owner pledges personal assets, such as their home or personal investments, to secure the loan.

For investors, this is especially common in asset-based lending, bridge lending, and other project-driven loan structures where speed and collateral value are central to underwriting.

What to Look for in a Secured Loan

Secured loans are offered by most banks, credit unions, and private lending institutions, but not all financing options are equally strategic. However, simply having assets available to use as collateral does not mean that a loan is guaranteed, or that it’s the right choice for your business and investment plan.

When considering your secured loan options, consider the following:

• Collateral requirements: What type of asset is required? What is the minimum value compared to the loan amount?
• Credit and income requirements: Do you meet the lender’s minimum credit score and income qualifications?
• Interest rate structure: What is the interest rate, and how does it compare to other funding options? Is it fixed or variable?
• Fees: How much will you pay in application or origination fees? Are there prepayment fees to consider if you decide to pay off the loan early?
• Limits: What are the maximum and minimum loan amounts available?
• Reputation: Does the lender have positive reviews and transparent loan terms? Or do they demonstrate a history of predatory lending practices that put you and your business at risk?

Because secured financing places personal and business assets at risk, working with a reputable lender and understanding the loan terms is critical. Borrowers should look beyond the rates to determine the full cost, structure, and strategic value of the loan.

Secured Loans FAQs

What is a secured loan?

A secured loan is a loan backed by collateral, or an asset that the lender can claim and sell if the borrower defaults on the loan. 

What is the difference between a secured loan and a collateral loan?

There is no difference. A secured loan and a collateral loan refer to loans that require the borrower to pledge an asset—such as property, a vehicle, or financial accounts—to secure funding.

Do secured loans have lower interest rates?

Often, yes. Because collateral reduces the lender’s risk, secured loans may offer lower interest rates than unsecured options. However, rates can still vary depending on the borrower’s credit profile, lender criteria, and the type of loan.

What happens if you default on a secured loan?

If a borrower fails to repay a secured loan according to the agreed terms, the lender may seize the collateral used to secure the loan. The lender may then sell the asset to recover the outstanding balance.

Can real estate investors use secured loans?

Yes. Secured loans are a common financing tool for real estate investors, who may use them to finance property purchases, renovations, or short-term investment strategies. The properties themselves often serve as the collateral for these loans.

What assets can be used as collateral?

Common collateral examples include real estate, vehicles, savings accounts, investment accounts, business equipment, and valuable personal items. The specific collateral accepted depends on the lender and the loan type.

Get Started With Ternus Today

If you’re considering a secured loan as part of your real estate investment strategy, asking the right questions is key to success. At Ternus, we provide straightforward answers and fast funding to help investors move quickly on projects. Our loan programs include:

• Fix-and-flip loans
• Bridge loans
• Wholetail loans
• DSCR loans
• Transactional funding

Connect with our team today to learn more about how Ternus can help you achieve your investment goals.