Loans aren’t free. You usually pay interest whenever you borrow (unless you get a 0% interest rate credit card), and often there are fees, too.
With a secured loan, you have an additional obligation. To demonstrate to the lender that you’re serious about repaying the money, you have to put up something that you own.
It’s basically a way of saying, "If I don’t pay you back on time, take this thing instead."
How does a secured loan work?
Secured loans include mortgages, auto loans, many personal loans and even some credit cards. The loans all have one thing in common.
The common trait of all secured loans is collateral. It’s the "stuff" that you have to put on the line when you take out these types of loans.
The collateral may be your house or your car. Or, you may have to put up a sum of money to back the loan.
When you secure a loan with property, you’re giving the lender more than just your word that you’ll make good on the debt. By putting an asset at stake, you’re putting more skin in the game and will be seen as a better risk.
This is why you often can get a secured loan even if you’ve got bad credit or are just starting out and don’t have much of a credit history. With a secured loan, the lender is able to reduce the risk they face when giving you a loan.
What is the difference between a secured and unsecured loan?
Many bank loans are unsecured, meaning you don’t have to present any collateral but are given the loan based on your credit scores, your track record with credit and your income.
To land an unsecured loan, you may also need a co-signer: A family member or friend who vouches for you — and agrees to pay the debt if you don’t. (But seriously, it’s best if you don’t ever have to put someone in that position.)
Student loans are unsecured loans. So are most credit cards and personal loans.
Unsecured loans can be harder to get and can come with higher APRs (annual percentage rates) than secured loans.
Another advantage of secured loans is that they often have higher borrowing limits, allowing you to get your hands on more money if you need it.
But unsecured loans don’t carry the risk that you could wind up losing something valuable if you run into financial trouble and are unable to repay the loan.
Common types of secured loans
The most obvious example of a secured loan is a secured personal loan from a bank, a credit union, or an online lender.
Here are a few other types:
Mortgages. In a mortgage, you borrow money to buy a house. The home then becomes collateral for the loan, and it can go into foreclosure and be taken from you if you default on your mortgage payments.
Home equity lines of credit (HELOCs). A HELOC is a secondary mortgage that allows you to borrow against the equity you’ve paid into your home. As with mortgages, there’s the risk that you can lose your house if you don’t make your payments.
Auto loans. When you borrow money to finance the cost of a vehicle, the car is the collateral and can be repossessed if you fail to keep your end of the bargain. Loans for motorcycles, boats and private planes also are secured loans.
Secured credit cards. People who have poor or nonexistent credit can get one of these cards by putting up a cash deposit as collateral. The card issuer can dip into the deposit if you don’t pay your bill.
Share Secured Loan. People with weak credit scores can also put up money in their savings account as collateral. These loans are easy to qualify for, though the amount you can borrow against varies from bank to bank.
This article Everything you need to know about secured loans originally appeared on Money.ca
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
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