A secured loan is a mortgage-backed loan — financial assets you own, such as a home or a car; that can be used as payment to creditors if you do not repay the loan.
The concept of secure loans is fundamental. Lenders accept collateral against a secure loan to encourage borrowers to repay the loan on time. After all, the prospect of losing a home or a car is a powerful incentive; to repay a loan and avoid being reprimanded or forfeited.
If you are applying for a secure loan; the lender will ask you what kind of collateral you will be able to apply to “repay” the loan. If you have trouble repaying a loan; the lender may file a mortgage (a lien is a legal name for a borrower’s mortgage.)
The lender can keep the loan running until the loan is repaid in full. At that point, the debt is deducted, and the ownership of the mortgage is returned to the borrower. In the event that the borrower is unable to borrow the loan; the lender may repay the security of the loan and sell it to repay any losses incurred on the loan.
That is why it is important for secured borrowers to understand; what assets they are using as collateral for the loan; to estimate the value of that asset against the potential liability or collateral losses if the collateral falls into default.
Types of Secured Loans
Protected loans come in many forms, but the three most common types of secured loans include the three bases of consumer loans; all of which require proper security before the loan can be approved.
- Mortgage Loans: Mortgage loans are high on the mortgage list. Such loans are considered “secure” by the lenders because the borrower puts his house as collateral. If the borrower does not repay the secured loan; the home may be blocked and the borrower may lose the home.
- Car Loans: Loans for cars, boats, motorcycles and even private jets are considered safe loans; as cars are used as collateral for repayment of loans. As with any loan, failure to repay the loan may result in the car being taken over by the lender.
- Protected Credit Cards: For consumers with no credit history; secure credit cards are a great way to get credit and build your credit points. But unlike mortgages or a secure car, safe credit cards require a cash deposit as collateral. If the card user does not pay the monthly bill; a cash deposit may be deducted from the card user’s account, and used for payment.
What Types of Security Can Be Used to Repay a Secured Loan?
Any legally recognized asset can be used to obtain a secure loan; although lenders will require a liquid mortgage (i.e., easily sold for cash) and have a value equal to the value of the secured loan.
Generally, the security of a secure loan comes in the following forms:
- Real estate, including any financial equity that you have acquired since you bought a home
- Bank accounts, including check accounts, savings accounts, deposit account certificates, and money market accounts
- Stocks, mutual funds, or bond investments
- Insurance policies, including health insurance
- Precious metals, top collections, and other essentials
- Loans secured in comparison
- Secure lenders should estimate the value of a secured loan or unsecured loan.
Although a secure loan means that the borrower will have to put up a significant security deposit to secure the loan; the unsecured loan is not supported by any collateral. If you delay repaying an unsecured loan or fail to repay the loan; the lender has no right to any of your assets. Credit cards, student loans, and personal loans are among the most common types of unsecured loans.
Secure loans have a few advantages over unsecured loans:
Because you are mortgaging a mortgage, a secure loan is easier to obtain than an unsecured loan. As lenders carry less risk on secured loans, borrowers with weaker credit scores find it easier to obtain secured loans. Secure loans often offer lower interest rates than unsecured loans; making secured loans a good choice for borrowers on a tight budget. Protected loans generally allow borrowers to obtain a larger loan amount than an unsecured loan, which offers the secured consumer extended financial options, although there are financial risks in the form of secured payment periods that may be lower. On the other hand, obtaining a secure loan usually means less time to repay the loan (as lenders would like to have a repayment, plus interest, rather than the borrower’s collateral.) unsecured loan, where the response usually comes in a day or two.
If a Borrower Errors When Receiving a Secured Loan
There is also the great disadvantage of not paying off secured loans. If that happens, the assets that you have pledged when you get the loan can be repossessed immediately. In many U.S. states, lenders are obliged to notify borrowers that their mortgage assets have been confiscated and sold to a consumer.
And that’s not all. If the repurchased asset collateral does not sell the full amount owed on the secured loan, the lender may require payment on the remaining portion of the amount owed to the consumer. In most cases, the lender’s repayment of the collateral can remain in the borrower’s credit report for up to seven years.
To avoid paying off a secure loan, borrowers need to be educated on loan terms and learn what steps to take if they start having trouble repaying a loan.
Getting a secure loan is a very personal financial matter, and it requires a lot of planning and preparation to get the right loan for your unique needs, as well as a solid repayment plan. Cover those important issues and your knowledge of secured loans can be a winner, get the loan you need while keeping your essentials on your behalf.