Secured loans are a popular type of loan. Though, they aren’t generally a borrower’s first choice, they do serve useful purposes. They often allow individuals to enjoy cheaper rates and better terms then they would with an unsecured loan. Home equity and home equity lines of credit are examples of secured loans. Each of these loans is secured by a person’s home. If a home owner were to default on the loan, he or she would lose their home. Title loans are another type of secured loan. These use a car’s (or other type of vehicle) title as collateral, which if the borrower fails to repay the loan or is late in doing so, can be repossessed by the lender.
Because so much is at stake, a person should carefully consider the pros and cons of a secured loan and exhaust all other options before settling on one. Being short of cash can be a traumatic enough experience. Losing a home or car because of a failure to repay a loan can be catastrophic. Even with the risks involved, people regularly utilize secured loans. This may be because of the cheaper interest rates, the attractive terms or simply because they have no other choice. Below, we’ll take a look at why some people opt for secured loans and why a person in need of a loan might consider them as well.
a. Cheap Rates: Lenders are willing to charge less interest on a loan that is secured by some type of asset. This is because they will be able to keep whatever asset is being used as collateral and so are willing to offer the loan for a fairly low interest rate, typically lower than what a person would pay for a secured loan.
b. Good Terms: Secured loans often have good terms, though not always. For instance, a title loan, which is generally a fast cash loan with a short repayment period, may not have the best terms but a home equity line of credit or a home equity loan may.
c. Little Choice: Some people are forced to go with a secured loan when they are in need of cash because they have few, if any other, options. A person with bad credit may find that only secured loans are available to them. Lenders are often willing to lend money to people with no or poor credit if the loan is secure. This is because, again, if the borrower happens to default on the loan, the lender will be able to keep whatever item was used to secure it.
Another time, a person may have little choice is when the loan is secured by nature of how it’s designed or structured, for instance a home equity loan or a home equity line of credit. These types of loans are automatically secured. It doesn’t matter how good or bad a person’s credit is, their house secures the loan.
Though secured loans are admittedly risky, there are some positives associated with their use. Secured loans are often cheaper then unsecured loans and sometimes have better terms, for instance, longer payback periods as is the case with home equity loans and home equity lines of credit.