Explaining Secured Loans
Secured loans demand assets or property as collateral for the loan. Collateral is not often necessary for loans, but in some circumstances it is. Money or other assets are acceptable collateral.
A Secured Loan: Definition and an Example
A secured loan is one where the lender asks you to put up collateral, such as real estate, another asset, or cash, in order to get funds. Several instances of secured loans are:
- Mortgages
- Home equity loans
- Auto title loans
- Car loans
Almost any institution that offers loans to consumers has secured loans available. There are alternatives to the usually secured loans that the majority of lenders offer, like auto and mortgage loans.
Others provide secured loans where you can pledge your CD or savings account as security.
Your collateral may be used if you don't make loan payments and your account goes into default.
How Secured Loans Operate
Loans give you the option to borrow money to make a current purchase, secured or not. The loan can then be paid back later, typically on a monthly basis.
A credit check is typically required for secured loans. Based on your credit history and credit score, lenders will decide your interest rate. Most of the time, the interest rate on a secured loan is lower than on an unsecured loan because you are putting up an asset as collateral.
If your loan is accepted, you will receive the money, but the lender will put a lien on your collateral. If you stop making payments and go into default on the loan, the lien gives the lender the legal authority to take back your property. The lender can sell the asset it seizes to try to recoup the money you borrowed.
This calculator can help you figure out how much your monthly payment will be, so you can avoid deals that push your budget too far and put you at risk of defaulting:
Make a Monthly Payment Calculation
Your monthly payment for a personal loan will depend on the amount, term, and interest rate of the loan (which is highly dependent on your credit score). Use the inputs below to get a sense of what your monthly payment could end up being.
Even if your lender resells your assets, the money from the sale might not cover the full amount you owe on the loan. The lender could pursue you in court for the remaining balance in that case.
Secured Loans vs. Unsecured Loans
Secured loans require collateral. Unsecured loans don’t require that you put up an asset to secure the loan. Lenders instead give out these loans based on your creditworthiness. Secured and unsecured loans have a few key differences. Secured Loan Unsecured Loan
Credit Score
- A credit score is used to determine eligibility and interest rate.
- A credit score is used to determine eligibility and interest rate.
- Collateral requires collateral of assets, property, or cash to disburse the loan.
- No collateral is required.
Loan Types
- These include mortgages, home equity loans, auto loans, secured credit cards, and home equity lines of credit.
- Student loans, personal loans, and credit cards are examples of these.
- Interest rates tend to be lower due to collateral.
- Interest rates tend to be higher because the lender is taking on more financial risk.
A Penalty for Default
- Your property, assets, or money can be seized to pay it off, and your credit score will drop.
- The loan will likely go into collections, your credit score will plummet, and you could still be required to pay it back in full.
Secured Loans: Pros and Cons
Pros
- A potential lower interest rate
- Some tax deductions are allowed.
- lower qualification threshold
Cons
- Could lose assets.
- Borrowing options are less flexible.
Pros explained
Potentially lower interest rates: secured loans are tied to an asset or property, so interest rates tend to be lower. There's a less financial risk for the lender. It's confident it will be able to get its money back, whether in the form of monthly repayments from you or from the sale of the collateral.
Some tax deductions are allowed: Some secured loans, like mortgages, let you deduct the interest you pay from your taxable income, subject to some restrictions. Some home equity loans offer this perk, depending on what you use the proceeds for.
Because you're putting up collateral, the qualification threshold is lower. Instead of putting so much weight on your credit score and history, the lender looks at what you're using to secure the loan.
The Cons might result in the loss of assets.
You risk losing your collateral if you fail to make monthly payments on schedule.
Some unsecured loans, such as personal loans, allow you to spend the money as you choose. Nevertheless, these loans are not as flexible in terms of borrowing. Secured loans are often secured by the collateral you provide. A mortgage is related to the residence it is used to purchase. Your auto loan is dependent on the vehicle you purchase.
Obtaining a Secured Loan
Traditional banks, credit unions, and online lenders offer secured loans. Consider those who specialize in the area in which you wish to purchase. If you wish to apply for a house loan, seek out a mortgage provider.
Compare lenders and get pre-approval to find out which ones offer the best rates and terms.
A secured loan application, such as an auto loan, can be processed within a few hours. However, mortgage and house loan applications might take up to two months to complete. Funding levels might also vary based on the sort of loan you obtain.
Various Options for Secured Loans
In most circumstances, secured loan alternatives will be expensive options. Payday loans are short-term loans that are backed by the borrower's next paycheck, but the APR could be as high as 400%.
Secured credit cards may pique your interest, but they may not be the best option because they need an initial cash deposit. If you default, the cash is used to pay down your amount.
Consider applying instead for an unsecured credit card for poor credit. If you pay off your credit card debt each month, you can avoid paying interest even if the interest rate is higher than average.
Key Takeaways
A secured loan needs security, such as real estate, assets, or cash.
Mortgages, home equity loans, and vehicle loans are typical examples of secured loan types.
If you do not pay back your secured loan, the lender may confiscate the collateral you posted. Depending on the sort of secured loan you've obtained, this may be your home or automobile.
In lieu of secured loans, unsecured loans such as personal loans, payday loans, and secured credit cards can be utilized.
When obtaining a secured loan, ensure that you are aware of the associated risks and that you have a sound repayment strategy.
