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What is a secured line of credit?

What Is a Secured Line of Credit?

Updated on October 23, 2022


So, you'd like to know what is a secured line of credit. You’ve seen the movie. A high roller comes to Vegas; he’s wealthy and loves to play the tables. Everyone knows who he is, and he always seems to beat the house. But not tonight. Tonight, his luck has run out, he’s on a losing streak, and the cash he brought with him has long since vanished. The surly Pit Boss comes over to the table and gives the dealer a nod. The dealer takes out a fresh stack of chips and slides them over to the high roller. Now our protagonist is in the hole; he’s got a problem, and he’s certain he can dig himself out of it.

We’re not sure how accurate to real life this scenario is, but we’ve seen it in a dozen or more movies. The chips he’s been given – the ones he has no cash on hand to cover – that’s representative of an unsecured line of credit. In an ironic twist, the casino is gambling on whether the high roller can make good on his implied confidence.

OK, so it’s a rough example of what doesn’t constitute a secure line of credit, but for our article, it will suffice as a starting point to the difference between secured and unsecured loan.

With a secured line of credit, it represents much more than just a potential collateral personal loan.

What is a Secured Line of Credit?

But let’s back up for a moment and talk basics. Specifically, let’s establish what a line of credit is, so we have an accurate picture going forward. Simply put, lines of credit are a financial arrangement between a lending institution and an individual. The most obvious example is a credit card. That card represents a specific financial amount that will be covered by the organization when you use it. You are then expected to repay that amount – with interest – to the lending institution or face financial consequences ranging from a damaged credit score to potential litigation.

You probably know all of this, but it is important to lay the basic outlines of a discussion to avoid any confusion. If you’ve seen any classic western movie, you might recall that there are usually scenes where a farmer might go to his local general store and buy seed for the upcoming season. He likely put all his purchases on a tab with the implied promise that the cost would be settled by a particular time. This is also representative of a line of credit. Those of you thinking “bar tab” would be correct in your assessment, but bars don’t do that anymore either. If you want to start a tab, you must give the server your credit card or debit card. This is not a line of credit, which is partly why we didn’t use this example.

However, some home improvement stores offer their credit for purchases exclusively at their places of business. These are unsecured lines of credit, and the interest rates are higher than typical credit cards with shorter terms.

A person who fills out an application for a credit card, and is given one by a lending institution based on their stated income and similar factors, then this is an unsecured line of credit.

Secured Lines of Credit Need Collateral

Secured lines of credit are backed by assets put up for collateral. For instance, let’s say a woman owns a house and she wants to make some improvements to it; maybe add a room or build a garage if the house originally did not come with one. She can use the home as collateral to secure a line of credit with a lending institution in which that home becomes collateral and can be seized by the lender in case of a default on loan. Using her home as security, she can get a credit card to do anything from purchase building materials to hiring construction workers or painters in the event she chooses not to do the work herself.

Secured Loans vs Secured Lines of Credit

Sometimes a secure line of credit is also called a secured loan. This is not untrue, but the two are separate financial arrangements with a lending institution when it comes to technicalities. For the lending institution, it is important to distinguish between the two for reasons that tend to get complex (things like percentages and numbers that only an accountant would love).

Secured loans and secured lines of credit are advantageous to both the lender and the borrower for many reasons, so we’ll just stick to the basics for this article. It should be noted that this blog entry does not constitute financial advice. Always conduct your research and read your personal loans documents thoroughly, making sure you understand every term.

The advantages of a secured loan to the lender are basic. Credit can be extended based on the idea that there is a tangible asset of some value that can be obtained in case the loan goes into default. This does not necessarily mean the lender will automatically seize the asset if a payment is missed, it merely indicates that there is real recompense (something of value) available to the bank if the terms of the loan are not met.

The advantages of a secured loan to the borrower are lower interest rates as well as higher borrowing limits than are typically available to borrowers with unsecured lines of credit.

There is also a motivating factor in repayment of secured lines of credit. Most borrowers know what is a secured line of credit and do not wish to lose the asset they’ve used as collateral, and many people who have had both secured and unsecured loans and lines of credit have attested to this as a good way to prioritize the repayment of a loan.

Now you know what is a secured line of credit. At CASH 1, most of the secured lines of credit come in the form of a secured loan with car title or car collateral loans; smaller to medium sized loans up to $50,000 borrowed against a vehicle. If you’re interested in learning more about the advantages of a personal loan with collateral, click the links and look at the services available.

Photograph of author Joseph Priebe

Joseph Priebe

Joseph Priebe takes pride in assisting audiences with his articles to help them make sound financial decisions.

With over ten years of experience writing financial content his goal at CASH 1 has always been creating engaging and easy-to-digest information for anyone searching for immediate or long-term monetary solutions.

When Joseph is not writing about personal finance, you can find him photographing the Southwest United States with his 4x5 Graflex Crown Graphic camera. He is based in Phoenix, Arizona.