What Is the Difference Between a Secured Loan & a Co-Signer?

Loans help customers cover emergency expenses and buy the high-ticket items they could not otherwise afford. If managed responsibly, a loan also can help a customer build a good credit history and raise her credit rating. Customers with a troubled credit history or a low income may not qualify for a traditional loan. As an alternative, the lender may offer a secured loan or the customer can look for a co-signer.

Basics

To qualify for any type of loan, such as an auto loan, mortgage or personal loan, a customer will have to meet the lender's eligibility requirements. The majority of lenders require that the customer have proof of income that would cover the loan payments. The lender also will look at the customer's credit history and score. Customers who do not have adequate income or a low credit score may not qualify for traditional loan products.

Co-Signers

A co-signer agrees to back the loan should the primary applicant default on the payments. This way, a customer who does not qualify for a traditional loan can still have access to the funding he needs. If he fails to make the monthly payments, the lender will charge the co-signer. The co-signer will need to have a better credit score than the primary applicant and a good source of income to qualify for the loan.

Secured Loans

A secured loan requires that the customer put up something as collateral against the loan. If the customer defaults on the loan, the bank can take possession of the collateral for payment. For example, with a mortgage loan, the house acts as the collateral. If the customer does not make the payments, the lender can foreclose on the house. Some lenders also offer personal loans backed by deposits. The customer puts a percentage of the loan into an account. The lender holds the deposit in the account during the duration of the loan.

Warnings

Both co-signers and secured loans present a level of risk. As a co-signer, the loan will appear on your credit report. If the primary applicant defaults on the payments, it will appear on your credit history as a negative remark. By putting up collateral on a loan, you risk losing your asset. If you lose your job, have a sudden illness or simply cannot make the payment, you run the risk of damaging your credit score and loosing whatever property or funds you used to get the loan.