What Is a Secured Loan?

When it comes to taking out a loan, a lot of people will choose secured loans. The reason is collateral. This means that once you take out a loan and cannot pay it back, the lender will take your assets to pay out their loss. This type of loan is most commonly used to finance big purchases, like a house or a car.

You probably have wondered what a secured loan is. This is a type of loan that is secured by collateral. In case you are unable to pay it back, the lender can take your assets to cover their losses. In simple words, you are putting your house or a car to secure your loan.

Usually, this type of loan has a lower interest rate than an unsecured one. This is because the assets you provide put the lender at ease regarding the security. However, if you don’t pay back the loan, you can lose your collateral. Considering that, make sure you are able to afford monthly payments before you decide to move forward.

How Do Secured Loans Work?

Once you take out a secured loan, you are putting collateral as a way to secure it. But how do secured loans work? Collateral is an asset that you put as a way to cover potential losses if you halt the loan..

When it comes to collateral, there are many different things you can put into securing the loan. Typically, people put up their houses. If you are using a home as collateral, it’s called a home equity loan. Other things you can use include cars, investments, and jewelry.

Because you are putting collateral, the interest rate is usually lower than if you take an unsecured loan. This means that this is a better option if you have a good credit score and steady income.

Keep in mind that if your credit score is bad, you will not be able to get this type of loan.

Types of Secured Loans

Secured loans have many different types, each one of them with its own features and benefits. Here are some of the most common types of secured loans.

Home Equity Loans

With this type of loan, you put up your house as collateral. So, if you default on the loan, the lender takes your house. This loan commonly has a lower interest rate, making it a good option for people with good credit.

Auto Loans

When it comes to this type, you will put your car as collateral to secure the loan. This means that if you halt the loan, your car is seized by the lender. This loan as well has a lower interest rate and is a good option if you have good credit.

Boat Loans

As stated in the name, with this type of loan, you put your boat as an asset to secure the loan. Like with other types, if you are unable to pay back the loan, your boat is taken by the lender to cover their loss. This type has a low interest rate as well, but if you don’t have good credit, you will not be able to take it.

Business Loans

When it comes to this type of loan, you are putting collateral, but instead of your house, it’s your equipment, or you insure it with a certain amount of money. This loan is only available if you have good credit.

What’s the Difference Between Secured and Unsecured Loans?

If you are looking to borrow money, you have a lot of different options available to you. The biggest decision you need to make first is whether you are looking to take a secured or unsecured loan. But what is the difference between them?

With a secured loan, you are putting collateral as a way to secure it. So, if you default on the loan, the lender will seize that collateral as a way to cover their loss. Because of this, secured loans usually have a lower interest rate. Also, they are easier to qualify for since you are using collateral as a safety net.

When it comes to unsecured loans, they don’t require any collateral. Simply put, if you halt a loan, you don’t have anything to back it up. Because of that, the lender can’t collect anything to cover their loss, so they can take legal action against you. Unsecured loans usually have a higher interest rate since they are riskier for lenders.

Another big difference is that secured loans can be personal, and you can get them from a bank or even online, while unsecured loans can’t be personal since you are not putting collateral as a way to secure it.

Is a Secured Loan a Good Option?

As we already mentioned, this type of loan is backed up by collateral. In case you are unable to pay the loan, the lender takes your asset, sell it and recover their money. This type of loan can be a great option for you if you have a steady flow of income and good credit and you are looking to borrow a larger sum of money.

Even if you are looking to take out a secured loan, there are always risks that you need to consider. Yes, you will get a lower interest rate than with the unsecured loan, but if you don’t manage to pay it back, the collateral that you put in will be taken by the lender.

With all of that said, if you are confident that you can pay back the loan and you are okay with putting your house or a car at risk, secured loans are a great way to get the needed money.

Alternatives to Secured Loans

Before taking out a secured loan, you might want to consider some alternatives.Here are your options.

Unsecured Loan

With this type of loan, you don’t have to put collateral. Since you are not putting an asset to secure the loan, interest rates are higher, and sometimes you might not get a big amount of money like you would with a secured loan.

A personal line of credit

The available alternative is also a personal line of credit. With it, you have access to your funds whenever you need them. This loan option also doesn’t require any collateral, but the interest rates can be higher than with a secured one.

Joint application

If you are looking to take out a loan, but you don’t want to put collateral, or you have bad credit, this is something for you. A joint application means that your friend or family member who has good credit can sign the loan. Keep in mind that if you fail to repay the loan, that person is responsible for giving the money back.

Final Thoughts

If you are considering getting a secured loan, just know that you will be required to put collateral. So before stepping forward, make sure you are able to pay out the loan back.

It’s very important to do your research and to consult with a financial advisor since you need to have good credit if you want to be able to qualify for loan. Make sure that this will not put a strain on your finances since you probably don’t want to lose your house or a car.

Finally, yes, this loan can bring you the large funding that you need, but it doesn’t mean it will be suitable for you, so make sure that your financal situation suits the opportunity.