What Is a Secured Loan?
A secured loan is any loan that is backed up by an asset or a piece of collateral.
Secured loans are the easiest way for consumers to get big loans without waiting too long. A lender won’t usually loan a big amount of money without something to back it up — in this case, your word is not good as gold. For the consumer, the secured loan can act as a guarantee that you will pay back the loan. For people who have trouble paying back debts, putting their house or another piece of collateral on the line is incentive to pay off the loan in a timely fashion.
What Kind of Collateral Do You Need for a Secure Loan?
An interesting tweak in the secured loan system is that the item being purchased (for which the secured loan is necessary) can be used as collateral. Most secured loans are taken out to buy a home or a car, and a lien can be placed on the item. This lien means that your bank or finance company will own the title or deed until the loan has been paid off, including any appilcable fees and interest.
If you don’t want to risk your home or your car on a secured loan, you can put up financial commodities like stocks or bonds as collateral, or a valuable piece of personal property.
What Other Types of Secured Loans Exist?
Not all secured loans are taken out to pay for new property. You can use a secured loan as a home equity loan or a new line of credit paid on your home’s equity. Some people are using secured loans as second mortgages as well. Secured loans not used for new purchases are based on the amount of equity in the home — this equity being the value of your home minus the amount still owed. In this case, your home is used as collateral. Be careful using a secured loan based on your home equity — if you don’t make payments on time you could lose your home.
There are still other types of secured loans, like debt consolidation loans. In this case, you use your home or another piece of property as collateral. The reason debt consolidation loans work — instead of paying off several high interest debts each month, a large chunk of money is loaned to you in order to pay off the original lenders, and you only have to pay back the one big secured loan. Interest rates for secured loans are almost always lower than the interest rate on your debt, and your monthly payments on your secured loan are likely lower than the payments made toward your debt. A secured loan used as debt consolidation loan will save you money as well as time mailing bills each month.
The secured loan is the opposite of the unsecured loan. An unsecured loan is a loan made without collateral. Your line of credit with a credit card, student loans, and even bank notes are generally unsecured loans. The difference? An unsecured loan has a much higher interest rate than a secured loan, because unsecured loans are not backed by collateral.
If you are looking for a loan and can’t seem to get a line of credit, a secured loan could be your ticket to the cash you need. If you own a piece of property with a high value to use as collateral, or if the item you’re trying to purchase can be used as collateral and placed under a lien, you could be on your way to the loan you need.
For more information related to secured loans, see some of the following pages:
- How to Consolidate Student Loans
- Types of Bank Loans
- How Do Credit Reports Work?
- How to Avoid Foreclosure
- Secured Credit Cards
- Unsecured Loans with No Credit Check
- Prepaid Credit Cards
- Government Debt Consolidation Loans