What are secured loans?
Secured loans are business or personal loans that require some type of collateral as a condition of borrowing. A bank or lender may ask for collateral for large loans where the money is used to purchase a specific asset or in cases where your credit scores are not sufficient to qualify for an unsecured loan. Secured loans can allow borrowers to benefit from lower interest rates because they pose less risk to lenders. However, some types of secured loans, including bad credit personal loans and short-term installment loans, can carry higher interest rates.
Key points to remember
- Secured loans are loans secured by a specific form of collateral, including physical assets such as real estate and vehicles or liquid assets such as cash.
- Personal loans and business loans can be secured, although a secured business loan may also require personal collateral.
- Banks, credit unions, and online lenders can offer secured personal and business loans to qualified borrowers.
- Interest rates, fees, and loan terms can vary widely for secured loans, depending on the lender.
Understanding secured loans
Loans, whether personal loans or business loans, may or may not be secured. With an unsecured loan, no collateral of any kind is required to secure it. Instead, the lender allows you to borrow based on the strength of your credit score and your financial history.
Secured loans, on the other hand, require collateral to borrow. In some cases, the collateral for a secured loan can be the asset that you use to purchase the money. If you get a mortgage on a house, for example, the loan is secured by the property you buy. It would be the same with a car loan.
If you default on the loan, that is, you stop making payments, the lender can seize the collateral that was used to secure the loan. So, with a mortgage, for example, the lender could initiate foreclosure proceedings. The house would be auctioned off and the proceeds used to pay off what was owed on the overdue mortgage.
Types of secured loans
Secured loans can be used for different purposes. For example, if you are borrowing money for personal use, secured loan options may include:
- Vehicle loans
- Loans guaranteed by shares or savings
- Secured credit cards
- Guaranteed lines of credit
- Car title loans
- Life insurance loans
- Bad credit
As mentioned, auto loans and mortgages are secured by their respective assets. Loans secured by shares or by savings work a little differently. These loans are secured by money you have saved in a savings account or certificate of deposit (CD) account with a credit union or bank. This type of secured loan can be useful in creating credit if you are having trouble getting approved for other types of loans or credit cards.
In the case of a credit card or secured line of credit, the collateral you provide may not be a physical asset. Instead, the credit card company or lender can ask for a cash deposit to be kept as collateral. A secured credit card, for example, may require a cash deposit of a few hundred dollars to open. This cash deposit then serves as a credit limit.
In some cases, a credit card company may convert your account to an unsecured card after you have made a number of consecutive monthly payments on time.
Regardless of what type of personal loan you are considering, it is often wise to use a personal loan calculator first to find the monthly payment amount, term, and interest rate that suits your needs.
Business loans can also be secured, although unsecured loans can be obtained. An equipment loan, for example, is a type of secured business loan. Suppose you own a construction business and need to buy a new dump truck. You can use an equipment loan, secured by the dump truck you are considering purchasing, to pay it off. As long as you pay off the loan on time, you don’t risk losing the equipment you bought.
One thing to note about secured business loans is that you may also need to sign a personal guarantee. This means that you agree to be personally responsible for any debt incurred by your business if your business does not repay the loan. So if your business is having cash flow issues, for example, you could be personally sued for a delinquent loan.
Car title loans and pawn shops
Other types of secured loans include auto title loans and pawn shops. Car title loans allow you to borrow money using your car title as collateral.Pawn shops can use anything from tools and jewelry to video game consoles, depending on what you are willing to pawn. These are usually short-term loans that allow you to borrow small amounts of money.
Auto title loans and pawn shops can carry much higher than average interest rates compared to other types of secured loans, and if you don’t pay them back, you could lose your car or personal property. held in pledge.
Life insurance loans
A life insurance loan allows you to borrow money against a life insurance policy using its cash value as collateral. You could then repay the loan during your lifetime or allow the loan amount to be deducted from the death benefit paid to your beneficiaries on your death. This type of loan is available with permanent life insurance policies, such as variable or whole life insurance.
Personal loans for bad credit are another category of secured loans. These are personal loans which are designed for people with bad credit history. Lenders may offer bad credit personal loans, but they may require some type of cash collateral, similar to secured equity loans, secured credit cards, and secured lines of credit. Note that a lower credit score can result in a higher interest rate and / or fees with a secured bad credit loan.
Where to find secured loans
Secured loans can be found at banks, credit unions or online lenders. When comparing secured loans, there are some important things to keep in mind. For example, you’ll want to watch:
- What type of collateral is needed to secure the loan
- The interest rate and the annual percentage rate of charge (APR) of the loan
- Whether the interest rate of the loan is fixed or variable
- Any fees charged by the lender, such as set-up fees or prepayment penalties
- Minimum and maximum loan amounts
- Credit score and income requirements for the loan
Comparing loan rates and terms with several lenders can give you an idea of ââthe likely cost of a secured loan. You can also compare them using an online secure loan calculator to estimate your monthly payments and the total amount of interest paid.
In the case of a secured business loan, you want to be sure to check out the requirements for a personal collateral. While this practice is quite common with both secured and unsecured business loans, you don’t want to be taken by surprise. And with a secured credit card, it helps to ask the credit card company if there is a way to convert the account to an unsecured card and refund your security deposit.