What is a Secured Line of Credit?

A secured line of credit is a type of loan that is secured by some type of collateral and allows a person or business to borrow from it as needed. Instead of taking all of the money for a loan up front, a person with a line of credit may use the money whenever the needed arises. In most cases, credit lines can be accessed over a long period of time, so the credit line holder can use the money over years, if necessary, without having to apply for a new loan. A secured credit line may be compared to a secured credit card, except the holder needn’t use a plastic card to borrow the money and may not be subject to the same repayment terms as he would expect with a credit card.

In order to be approved for a secured line of credit, a person or business is usually required to provide some type of collateral. If a business applies for a secured line of credit, for example, it may pledge its account receivables as collateral. It may also pledge inventory, equipment, or other property. An individual may pledge assets he personally owns, such as real estate, securities, or even such things as artwork. In the event that the person who is granted the line of credit defaults on his payment, the lender may then seize the collateral in an effort to recoup all or part of the money owed.

While some parties may prefer unsecured lines of credit, which do not require any collateral, there may be some advantages to secured credit. For example, some lenders may be more willing to provide higher credit limits for individuals who secure their credit lines with collateral. Often, the interest on these lines of credits is lower as well. Additionally, many lenders are willing to offer applicants more favorable borrowing terms since there is less risk involved in lending when collateral is provided.

A person or business with bad or less-established credit may find a secured line of credit easier to obtain than an unsecured credit line. Lenders may be less strict about credit scores when they know the borrower has something of value they can seize in a default situation. These lines of credit may also prove attractive to those with excellent credit, however. In the interest of saving money, a person or business with good credit may prefer to offer collateral instead of facing inflated interest rates and other charges.