Allison Martin is a personal finance enthusiast and a passionate entrepreneur. With over a decade of experience, Allison has made a name for herself as a syndicated financial writer. Her articles are published in leading publications, like Banks.com, Bankrate, The Wall Street Journal, MSN Money, and Investopedia. When she’s not busy creating content, Allison travels nationwide, sharing her knowledge and expertise in financial literacy and entrepreneurship through interactive workshops and programs. She also works as a Certified Financial Education Instructor (CFEI) dedicated to helping people from all walks of life achieve financial freedom and success.
Updated February 14, 2024
Credit cards and personal loans aren’t the only way to access the cash you need. A secured line of credit could also be an option, but maybe you’re unsure how it works. In this guide, you’ll learn what to expect when you open a secured line of credit, along with the key benefits and drawbacks it offers, eligibility criteria and other alternatives worth considering.
Loading. Loading.As the name suggests, a secured personal line of credit is a debt product backed by collateral. Common assets used for security include vehicles, homes, boats or other valuables. You can apply for a secured line of credit through traditional banks, credit unions or online lenders. If approved, you’ll have access to a pool of funds you can draw from, typically through a lender-issued debit card or check. There’s also the option to deposit the money directly into your checking or savings account each time you make a withdrawal if you already do business with the financial institution. There’s no obligation to use the entire amount, and you’re free to repay and reuse the funds as often as you like during the draw period. Plus, you’ll only pay interest on the amount you use.
Since these debt products pose less of a risk to lenders, you could receive a lower interest rate than you would with a credit card or loan designed for consumers with less-than-perfect credit. This can be particularly beneficial if you’re trying to consolidate high-interest debt or if you need to borrow a large amount of money.
Cash flow issues can mean bad news for your finances and credit health. But with a secured line of credit, you’ll have access to a pool of cash that you can pull from any time money’s running low. This can help you avoid late fees, penalties, and other financial consequences of missed payments.
You don’t need good or excellent credit to qualify for a secured line of credit. In fact, it’s highly likely that you’ll get approved if the asset you use as security holds substantial value. So, if you’re struggling to get approved for other types of loans due to past credit missteps, you could be in luck.
Loading. Loading.Most secured lines of credit come with extended repayment periods. This beats payday loans and other expensive forms of credit that only give you a few weeks or months to repay what you borrow. It can also be a significant advantage if you need to borrow a large amount of money or if you need more time to repay what you borrow. With a secured line of credit, you can typically repay and reuse the funds as often as you like during the draw period, which can span several years.
You won’t get approved for a secured line of collateral without putting up collateral as security. This makes these loan products inaccessible to consumers without assets.
If life happens and you fall behind on loan payments, you could lose the asset you put up as collateral if the lender seizes it to recoup what they’re owed.
Depending on market conditions, you will likely get a variable interest rate, which means your borrowing costs could be high or low. Monthly loan payments will also vary over time.
If you fall behind on loan payments or default on the loan, your credit score can be negatively impacted. Unfortunately, it can also become more challenging to qualify for credit products in the future. And if you are approved, you’ll likely get unfavorable terms and higher interest rates.
A secured line of credit can be a great tool for accessing funds when you need them. By using your asset as collateral to secure the loan, you may be able to qualify for a larger amount of credit or a lower interest rate than you would with an unsecured loan. However, it’s important to carefully consider the risks and drawbacks of a secured line of credit before you apply.
You’ll need to have an asset with substantial value to use as collateral, and you’ll need to demonstrate that you have the means to repay the loan. It’s also vital to carefully manage the credit line to avoid defaulting and forfeiting your collateral.
If you’re considering a secured line of credit, be sure to shop around and compare offers from multiple lenders to find the best terms and rates. If you’re not sure whether a secured line of credit is the right choice for you, consider speaking with a financial or credit counselor to get personalized guidance based on your individual needs and goals.
With careful planning and responsible borrowing, a secured line of credit can be a valuable tool for managing your finances and achieving your financial goals.
For example, Current offers a secured credit card called the Current Build Card, which uses the funds you keep in your secured account to make sure you can only spend the funds you have. You can choose to set up Auto Pay to pay your balance twice per month or pay manually. However you decide to do it, Current will report these positive payments to the credit bureaus, helping you build or improve your credit score. On top of that, the mobile app also offers features like the Current Spend Account, with budgeting tools to help you manage your finances, savings pods that earn up to a 4.00% bonus, and crypto investing. Visit the Current’s website to learn more or to open your free account.
