What is a secured loan? Other than being the opposite of an unsecured loan – and this definition is more than a tautology, you’ll see why soon enough, a secured loan is granted over an asset with some financial value.
In other words, the borrower will pledge his car or house as collateral for the loan. The creditor will, therefore, be given access to an asset equal in value to the money to be repaid.
If you’ve been shopping around for a new car or house, you’ve already encountered these terms. By now, you must be aware that the bank or the financial institution that lends you the money will hold property deed until the loan has been paid in full. Including fees and interest.
As opposed to unsecured loans, the interest rates in a secured one tend to be cheaper. Be warned, though, it’s a double-edged sword. If you can’t make your payment in time, you might end up either a pedestrian or, even worse, a homeless pedestrian.
All things said, it’s important to understand the inner workings of a secured loan practice.
What Is a Secured Loan versus The Alternatives?
How Does a Secured Loan Work?
When it comes to secured loans, the offer on the table looks like this: higher borrowing limits, lower interest rates, and longer repayment terms. The recipe is fair and perverse at the same time.
If you can’t stick to the agreed terms and conditions, and find yourself unable to repay a secured loan, the loan provider can repossess the asset you guaranteed with. And more often than not, people put their homes on the line.
So what is a secured loan? Examples include:
- Home equity line of credit.
- First charge mortgage – It means you’ve taken out a loan for home improvement purposes. There must be no pre-existing mortgage.
- Second charge mortgage – It means that, on the basis of a first charge mortgage, you’re making a new agreement with your lender or going to a different lender.
- Auto loan or boat loan – The interest rates on secured vehicle loans are usually fixed and cheaper than in an unsecured loan.
How to Obtain a Secured Debt?
What is a secured loan to the creditor? Answer: secured debt. The creditor will ensure the debt by statutory lien, contractual agreement or judgement lien.
When you take a security loan based on items purchased – furniture, the new HD video equipment, the Sunday family trip vehicle, you can sign a contractual agreement by a Purchase Money Security Interest loan.
Or the creditor might take a security interest in items that you already own through a Non-Purchase Money Security Interest loan.
What Is a Secured Loan? Compare the Pros and Cons
Pros of a Secured Loan
- Inexpensive: You will normally pay a lower interest rate than with a personal loan. In the 1940s, the United States was the first country to draw an answer to the question: what is a secured loan? They developed and adopted the notion that was to turn the economy into one of the strongest on the planet.
- Low credit: You will qualify easier for a secured loan is you have low credit. It makes the lender risk less because it will liquidate the account easily if you fail your monthly payments.
Cons of a Secured Loan
- High risks: On any secured loan, you – the borrower- will relieve the lender of the risk, taking it upon yourself. If you cannot meet the payments, you’re at risk of losing your home.
- Variable interest rates: Monthly repayments could increase if your contract states a variable interest rate. Make sure you read the terms and conditions before signing up for a secured loan.
- High-fees: Arrangement fees and other set-up costs vary from lender to lender. Compare offers and also consider how much your final fees will amount to every month. If you sense you cannot comfortably adjust to the requirements, don’t jump into it. Simply avoid lenders who charge high fees.
- Less credit reward: Secured loans will not boost your credit score as much as unsecured ones. Usually, secured loans don’t act as the best calling cards. They reveal you didn’t quite make the income cut to achieve an unsecured loan.
How Does an Unsecured Loan Work?
Since the borrower offers no asset to vouch for his/her good will towards the bank, unsecured loans transfer the risk weight on the lender’s shoulders. It explains why the lender will take additional measures to ensure he’s not losing money. One of the most visible ones is a higher interest rate.
Who benefits from unsecured loans?
Individuals who wish to make some minor home improvements usually borrow small amounts from banks. Car buyers may opt for unsecured loans as well, at either variable or fixed rates. Other types include student loans, credit card purchases or personal lines of credit.
Family members can also act as guarantors for unsecured loans, this being usually the case for students who find themselves unable to make the repayments.
What are the 5Cs of credit?
Only apply for an unsecured loan if you’re certain you can repay it. The bank will take a good look at your financial CV, so make sure your 5Cs are bulletproof – capacity, character, capital, collateral, and conditions.
If you’re creditployable, there’s a long road of paying off debt waiting ahead of you. The first 4 Cs refer to your willingness and capacity to repay the debt, while conditions also include external factors, such as the global economic situation.
What Is a Savings Secured Loan?
What is a secured loan for your savings account? The funds in your saving account can perform a double role. The money is generally there to accrue interest and fatten that initial principal deposit. But you can also employ it to boost your creditworthiness.
With a Savings Secured Loan, you can use your money as collateral to build up credit or borrow money without stretching your savings dollars. You might ask yourself why borrow money and pay an interest on it if you already have money in the bank?
It’s mostly about building credit credential. Loans secured by cash are normally tied deposits, savings accounts or certificates. The same bank you keep your savings at will give you the loan while freezing your account to prevent any future withdrawals. At least, not until you’ve paid off the loan.
So which one is it? What is a secured loan versus an unsecured loan?
Your needs and ability to pay off debt should be the pillars on which you make the choice. Lenders will always be more willing to offer you a loan if it is both backed by an asset and comprised of higher amounts, usually over $30,000. If you’ve never lost at Monopoly, then maybe a secured loan is the choice to bet your money on.