A secured credit line is one that is leveraged — or secured — against an asset, commonly a cash deposit or a home. In the event that a borrower fails to make monthly payments on their credit for an extended period of time, the lender can seize the asset to recoup their losses.

Balancing a line of credit against an asset makes secured credit lines less risky for lenders and more accessible for people with poor or no credit.

Types of Secured Credit Lines

Secured credit lines come in many forms. Understanding the different types makes it easier to decide which is right for you.

Secured Credit Cards

A secured credit card works like an unsecured, or “standard,” credit card with the exception of how the credit line is established. When someone applies for a secured card, issuers require that the borrower put down a security deposit, usually of at least a few hundred dollars. That security deposit usually equals the size of the credit line that the issuer can approve: If you put down $500, your credit card would have a limit of $500. The security deposit doesn’t always equal the credit line, but that’s the most common situation.

If a borrower decides to close their secured credit card, and if the account is in good standing and paid in full, they’ll receive their security deposit back in full.

Mortgages and Auto Loans

Mortgages and auto loans are two other types of secured credit lines. These loans are categorized as secured because a borrower’s failure to make payments on their home or car loans can result in the lender seizing and liquidating the assets.

HELOC (Home Equity Line of Credit) loans are another type of secured credit line taken out against equity that is already owned by the borrower in a home. The danger of a HELOC comes if a borrower doesn’t pay back the loan; their home can be seized.

Credit-builder Loans

For those who don’t have enough cash to put down a security deposit on a secured credit card, a credit-builder loan is an option to get access to credit, build your credit history and eventually get an unsecured line of credit.

When you’re approved for a credit-builder loan, you don’t actually get access to the money you’re borrowing until the loan’s term is up. That is, the loan is frozen in an account and the borrower makes monthly payments on the loan as they would on a normal loan. At the end of the loan’s term — after the borrower has paid the loan off — they’re able to access the loan amount minus a fee paid to the lender. In this way, paying off a credit-builder loan is like contributing to a savings account, yet building your credit in the process.

Should You Get a Secured Credit Line?

If you have limited or no credit history and are having trouble getting approved for an unsecured credit line, a secured credit line may be a good option. Just consider the right financial tool for your needs and be sure to practice responsible credit repayment behaviors.

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