Is a Personally Guaranteed Loan Considered Secure?

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Your savings account can be used to secure a loan.
Your savings account can be used to secure a loan. (Image: Andrew Bret Wallis/Pixland/Getty Images)

A loan secured by a personal guarantee is not actually a secured loan. A secured loan is backed by assets placed as collateral. If the borrower defaults, the collateral is surrendered. With a personal guarantee, the borrower signs his name on the loan; the only thing at risk is a credit score. In the case of default, the borrower loses nothing.

Types

There are two broad categories of loans: secured and unsecured. Secured loans use a form of asset as collateral; unsecured loans don't. Typically, secured loans are less costly to the borrower. By sharing in the bank's risk by placing collateral, a borrower can get lower interest rates. Unsecured loans are riskier for the lender, but the borrower risks nothing except her own credit. For this reason, unsecured loans tend to be more expensive.

Misconceptions

Many lenders advertise "personal guarantees" as a form of security on the loan. They do this to draw borrowers in, mixing up the two terms to attempt to lure more business. A personal guarantee is a signature loan. You're not placing an asset on the line, so there's no security against default for the lender. You'll likely get charged interest as if you're taking an unsecured loan.

Considerations

Some lenders use cash collateral as a personal guarantee. In this case, the loan is, in fact, secured against an asset. For example, the Small Business Association (SBA) requires a 20 percent down payment from the borrower as a form of personal guarantee on any debts it insures. When cash is used as a form of personal guarantee, the loan is secured.

Examples

A mortgage loan is nearly always secured against the home itself. Most mortgages also require an additional down payment from the borrower. Mortgage loans tend to have moderately low interest rates, despite their lengthy loan terms, because they're secured against such a sizable form of collateral. On the other hand, a personal loan to purchase a vacation likely has a high interest rate. This type of loan is secured only with a personal guarantee to repay the debt. If the borrower defaults, the bank is left with nothing. This is risky, even though the limits may be small.

Advantages and Disadvantages

Risky loans tend to build credit quickly. If you're looking for a quick credit boost, take an unsecured loan with a personal guarantee and pay it off quickly. On the other hand, when you place collateral for a loan, you don't see as positive an impact on your credit score. You're sacrificing an asset from your balance sheet and turning it into a debt. Secured loans are best when you're looking for low interest rates, don't need a quick boost in credit and are generally confident you can repay the debt.

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