A secured loan is a financial aid that requires the borrower to use an asset, such as a home, car, or savings account, as collateral. This collateral serves as the main security for the lender, ensuring that the borrower gets his loans repaid.
Furthermore, secured loans are acquired mainly because of their use for large purchases or significant financial needs. Additionally, it offers lower interest rates and higher borrowing limits to the borrower compared to unsecured loans. Also, secured loans are easier to qualify for as they have lower interest rates since they pose less risk to the lender.
How Does A Secured Loan Work?
Getting these secured loans means that it is backed by an important asset that you own. Before you apply for the loan, the lender will want to know which asset of yours you plan to use as collateral.
Next, you pledge your boat, savings account, car or home as the collateral for the loans, and the lender proceeds to place a lien on the asset. It will be that way until the loan is fully repaid. However, if you default on the loan, the lender can proceed to claim and sell the collateral to recover the loss.
Moreover, most of the secured loans are installment loans, and this means that you receive your funds and make equal monthly payments. Also, the interest rates are fixed and the repayment terms could be as short as one year or as long as 30 years for a mortgage loan.
Types of Secured Loans
There are several types of secured loans, with each designed for specific financial needs. Understanding these different types can help you choose the right loan for your situation. Here are some of the types of secured loans:
Mortgage Loans
A mortgage loan is a secured loan that is used to purchase real estate. The property that is being purchased will serve as collateral to the lender for the loan. Mortgages are typically long-term loans with their repayment periods ranging from 15 to 30 years. Unfortunately, if the borrower defaults on the mortgage, the lender can foreclose on the property, which means they can take ownership and sell it to recover the loan balance.
Home Equity Loans
A home equity loan is a type of secured loan that allows homeowners to borrow against the equity they have built up in their property. The loan amount is based on the difference between the home’s current market value and the remaining mortgage balance. What’s more, home equity loans are often used for home improvements, debt consolidation, or other significant expenses.
Auto Loans
Auto loans are secured loans used specifically to finance the purchase of a vehicle. The vehicle being purchased serves as the collateral for the loan. Also, auto loans generally have shorter repayment terms than mortgages, typically ranging from 3 to 7 years.
Secured Personal Loans
Secured personal loans are loans that require collateral like a savings account, certificate of deposit (CD), or other assets. These loans can be used for numerous purposes like debt consolidation, medical expenses, or major purchases. Moreover, the interest rates on secured personal loans are generally lower than unsecured personal loans due to the reduced risk for the lender.
These are some of the types of secured loans available to borrowers and how they work.
How To Get A Secured Loan
Secured loans involve several key steps, from the application process to repayment. Here is the process of getting a secured loan:
Application Process:
The first step in obtaining a secured loan is to apply with a lender. The application involves you providing information about your financial situation, the purpose of the loan, and the asset you intend to use as collateral.
Collateral Value Assessment:
To get the loan, the lender will need to assess the value of the collateral you are presenting. This may involve an appraisal of the property, vehicle, or other assets being pledged. The value of the collateral will help determine the loan amount you can borrow.
Loan Approval:
Once the lender has evaluated your application and the collateral, they will decide whether to approve the loan or not. If approved, you will receive a loan agreement outlining the terms, including the interest rate, repayment schedule, and any fees. You must review this agreement carefully before signing.
Loan Disbursement:
Once you have signed the loan agreement, the lender will proceed to disburse the loan funds. Depending on the type of loan, the funds may be paid directly to the seller (as in the case of an auto loan) or to your bank account.
Repayment:
You can then use the loan for whatever purpose you want. The repayment of a secured loan comes last and it involves making regular monthly payments over the agreed-upon term. These payments include both principal and interest.
These are the step-by-step process of how acquiring a secured loan works. As the borrower, it is crucial to make payments on time to avoid the risk of losing your collateral.
Benefits of Secured Loans
Several benefits and advantages come with getting a secured loan and these are what make the loans an attractive option for borrowers. Many of the benefits include:
Lower Interest Rates
Since secured loans involve collateral, the lenders face less risk which allows them to offer lower interest rates compared to unsecured loans. This can result in significant savings over the life of the loan.
Higher Borrowing Limits
Another great benefit of secured loans is the higher borrowing limits. This allows borrowers to access larger amounts of money, making them ideal for significant expenses like home purchases, renovations, or debt consolidation.
Improved Approval Chances
With this, even borrowers with less-than-perfect credit may find it easier to qualify for a secured loan because the collateral reduces the lender’s risk. Also, this can make secured loans a good option for those who might not qualify for an unsecured loan.
Flexible Repayment Terms
Acquiring secured loans also often comes with more flexible repayment terms, allowing borrowers to choose a loan term that fits their budget and financial goals.
These are some of the best benefits and advantages of choosing to borrow a secured loan.
Risks of Secured Loan
While secured loans offer many benefits, it also comes with its own risks that borrowers should be aware of. Many of those risks include:
Risk of Losing Collateral
One of the most significant risks of a secured loan is the potential loss of the collateral if you default on the loan. The failure to repay a mortgage one time can result in foreclosure, and defaulting on an auto loan can lead to repossession of the vehicle.
Long-Term Commitment
Secured loans like mortgages and home equity loans, often involve long-term commitments to them that can last for many years. This extended repayment period can prove to be challenging if your financial situation changes.
Impact on Credit Score
Another risk that borrowing secured loans might pose is that it could possibly damage your credit score. While secured loans can help build credit if managed responsibly, all missed payments or defaults can affect credit scores, and this makes it harder to obtain credit in the future.
Potential for Over-Borrowing
The higher borrowing limits of secured loans are one of the benefits because of the large amount of money you can get. However, it can also tempt borrowers to take on more debt than they can comfortably repay, leading to financial strain.
Best Lenders To Get Secured Loans
Here are some reliable, legit lenders you can get great personal secured loans and excellent customer service from:
- LightStream
- Achieve
- Upstart
- Happy Money
- Avant
- Best Egg
- LendingClub
- Upgrade
- And more
Each of these lenders offers you competitive rates, different types of secured loans, and more services.
Frequently Asked Questions
Here are some frequently asked questions about secured loans you can check out:
What types of assets can be used as collateral for a secured loan?
Most of the common assets that can be used as collateral include real estate, vehicles, savings accounts, certificates of deposit (CDs), and other valuable property.
Can I get a secured loan with bad credit?
You can get secured loans even with bad credit. Secured loans are often available to borrowers with poor credit because the collateral reduces the lender’s risk. However, the terms of the loan may vary depending on the lender and the value of the collateral.
Are secured loans better than unsecured loans?
Actually, they both have different terms, different benefits and different risks. So, a secured loan is better than an unsecured loan or vice versa depending on your financial situation, credit score, and the purpose of the loan.