When borrowing money, you will likely need to make a decision about whether to get a secured loan or an unsecured loan. But what’s the difference between these loans?
What Is a Secured Loan?
This is a loan that has collateral, something valuable is attached to the loan just in case you default on the loan, for instance, a car or a home. The bank or the lender will request you to provide the collateral or security in case of a large loan for which the money is being used to purchase a specific asset or in case your credit score isn’t sufficient to get you qualified for an unsecured loan.
One of the main advantages of secured loans is that you will get low interest rates since they pose a low risk to the lenders. That is not to say that you cannot pay high-interest rates for the secured loans, you can as in the case with bad credit personal loans and some short-term installment loans. These usually carry high-interest rates.
Types of Secured Loans
With any type of loan, the lenders want to know that they have something that they can comfortably leverage if you default on the loan. Once they place a lien on your security, they are guaranteed that if the worst-case scenario happens, they can legally take possession of their assets using that collateral. Collateral still doesn’t guarantee payment of the loan, but, it does give the lenders a sense of security knowing that it will give the borrower more impetus to pay up the loan. The following are some types of secured loans;
- Mortgage- with mortgage loans, your home acts as collateral in order to buy the home. In case of default, the home can be foreclosed.
- Auto loans- this is a loan taken to buy a car. In this case, your car will act as collateral such that in case you are unable to make the payments in time and in full, the vehicle could be seized.
- Business loans- these are loans used to buy equipment, pay up wages or invest in business projects. When taking out a business loan different things can be used as collateral such as inventory.
- Home Equity line of credit – also known as HELOC, gives you access to your home equity in the form of a line of credit, for example, a credit card. With HELOC, your home acts as collateral.
- Bridging Loans- these are secured against your current property and usually are used to fund the gap between selling your home and buying another home.
- Debt consolidation loans- these are the loans that are used to pay off a number of debts such as other loans and credit card loans. When you consolidate your loans, you can ultimately increase the amount of interest that you’ll be paying overall while also setting up a repayment plan that will set you towards clearing the debt.
The Collateral That Can Be Used In Secured Loans
When you secure a loan, you can be sure to get large sums of money. The good thing is that nearly anything can be used as collateral as long as it is acceptable by the law. Most lenders however prefer to deal with assets that they can easily seize and turn into cash fast. What you use as collateral will largely depend on whether the loan you want is for personal or business use. Examples of collateral include;
- Real estate.
- Cash accounts- retirement accounts mostly do not apply.
- Cars and other valuables.
- Machinery and equipment.
- Insurance policies.
- Valuables and collectibles.
Where Can You Find Secured Loans?
Secured loans mostly can be found at the banks, with credit unions, or with online lenders. However, when comparing your options so far as secured loans are concerned, there are a few things that you need to keep in mind.
For instance, you may want to look at;
- The type of collateral that is required to secure the loan.
- The interest rates and the annual percentage of return.
- Also, look at the loan’s interest rate, is it fixed or variable?
- The lenders charge, for instance, the origination fees or the prepayment penalties.
- The minimum loan amount and the maximum loan amount.
It is also advisable to hunt for lenders. Do not just settle for any lender, do your due diligence by comparing the loan rates and terms with multiple lenders and this is important as it will give you an idea of how much a secured loan is likely to cost.
In case you want to get a secured business loan, it is important that you first check personal guarantee requirements. This doesn’t just apply to the secured loans, it also applies to unsecured loans. Remember, you don’t want to be caught by surprise.