From mortgages to student loans to the ever-popular credit card, there are a huge variety of loans available for application. Due to the array of loan options out there, each loan type has its own terms and characteristics, meaning that different loans will suit different people.
Secured loans are by far one of the most popular and well-known types of loan. But, despite this, newcomers to the world of borrowing money may find the term ‘secured loan’ a little confusing to begin with. And, if you don’t understand the nature of the loan, it will be impossible for you to make an educated decision when choosing which loan to apply for.
So, if you’re interested in a secured loan but aren’t sure what it actually means, here are some key pointers you need to know!
What is a secured loan?
Secured loans are loans given when collateral is in place to protect them. This means that, if the loan has been used to purchase something like a house or a car, a lien can be placed on the purchased item so the lender can hold its title until the loan has been fully repaid. If payments are missed, the lender will then have the right to collect and take ownership of the loan’s collateral.
Due to the nature of secured loans, they significantly reduce the risk to the lender which is why this type of loan is often easier to get than unsecured loans. Often the only legitimate way to get your hands on large sums of money, secured loans generally offer longer repayment schemes and lower interest rates than unsecured loans, simply because of the reduced risk to the lender.
Some of the most common examples of secured loans include car loans and mortgages.
Advantages of secured loans
One of the main benefits of secured loans is they’re often much easier to obtain than unsecured loans. So, if you’ve been refused an unsecured loan (like a credit card) due to a bad credit score, you’ll likely have a better chance getting a secured loan instead.
These loans also have lower interest rates because there’s less risk for the lender, and they’re often a great method of rebuilding credit if necessary. Learn more from companies that specialize in personal loan assistance and information.
Disadvantages of secured loans
You’ve probably worked this out already, but one of the main dangers of a secured loan is you may lose your collateral i.e. home or car if you fail to make your repayments. Not making payments on time will also damage your credit score.
It’s, therefore, crucial to properly analyze your budget and be 100% sure you’re able to make each payment before committing yourself to a secured loan.
Whilst secure loans have many benefits and can almost seem too good to be true, especially if you’ve been refused unsecured loans in the past, it’s still important to fully understand what they truly entail. But now you know exactly what a secured loan is and the potential risks associated with them, you’re able to make a fully educated decision you may not have been able to make before!