What Is A Secured Loan?
Do you have assets, like a house or a car? Did you know you can leverage these to help secure your next loan with a financial institution? Borrow money from financial institutions with confidence by knowing what a secured loan is and how you can use it.
What Is A Secured Loan?
Simply put: a secured loan is backed by collateral. Collateral is any asset(s) the borrower has that the financial institution can collect if the borrower can’t repay the loan. Sounds scary, but consider it a guarantee of trust between both parties.
To get approved for a secure loan, you must offer an asset as collateral. If you are unable to make consistent, on-time payments and default, the lender can collect this asset as an effort to recoup their losses.
This mutual exchange lowers the lender’s risk and extends loans to borrowers at smaller interest rates and to those who may not have been approved for an unsecured loan.
Examples of Secured Loans
What kind of collateral do you need for a secure loan?
- A mortgage is backed by the home you purchase.
- An auto loan is backed by the vehicle purchased with the loan.
- A personal loan can be secured by a savings account or any other assets.
- A home equity loan or HELOC is backed by the home’s equity.
If any of these types of loans end in default, the lender can collect the collateral.
Advantages & Disadvantages
Before you apply for a secured loan, understand what you are signing yourself up for. There are many advantages to a secured loan, but one major downside. Some of the pros to look for are:
- Lower interest rates – Lenders generally offer lower interest rates compared to unsecured loans. Since this loan is backed by collateral, it reduces the lender’s risk and removes the need to “overcharge” for an unsecured loan.
- Easier approval – If you don’t have the greatest credit score, don’t count yourself out for a loan. Lenders are more likely to approve a loan if it is tied to an asset. As long as you are able to meet other requirements and have collateral, you are likely to be approved for a secured loan – and it can be a good tool to start raising that score.
- Higher borrowing limits – The value of your collateral allows for higher loan amounts. Secured loans can fund large purchases.
The biggest downside to a secured loan is falling behind on the payments. If you can’t make the payments, you risk losing your asset. Usually, financial institutions will work with you to help get you back on track and making payments, but once you default, they have every right to seize your asset. From there, they will try to recoup the amount they lent to you by selling it to another buyer or liquidating it.
Secured loans are a powerful financial tool when used wisely. If you choose to apply for a secured loan, make sure you are in a good financial position and are able to pay your loan on time, no matter what life throws at you. Smart borrowing today can lead to reaching your future financial goals.