What are Secured Loans

Posted on May 26, 2009 | What at mybiginfo.com | What are Secured Loans | | View all What | |

A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan. The debt is thus secured against the collateral — in the event that the borrower defaults, the creditor takes possession of the asset used as collateral and may sell it to satisfy the debt by regaining the amount originally lent to the borrower. From the creditor’s perspective this is a category of debt in which a lender has been granted a portion of the bundle of rights to specified property. The opposite of secured debt/loan is unsecured debt, which is not connected to any specific piece of property and instead the creditor may satisfy the debt against the borrower rather than just the borrower’s collateral.

Secured Loans

Secured loans are those loans that are protected by an asset or collateral of some sort. The item purchased, such as a home or a car, can be used as collateral, and a lien can be placed on such purchases. The finance company or bank will hold the deed or title until the loan has been paid in full, including interest and all applicable fees. Other items such as stocks, bonds, or personal property can be put up to secure a loan as well.

Secured loans are usually the best way to obtain large amounts of money quickly. A lender is not likely to loan a large amount without more than your word that the money will be repaid. Putting your home or other property on the line is a fairly safe guarantee that you will do everything in your power to repay the loan.

Secured loans are not just for new purchases either. Secured loans can also be home equity loans or home equity lines of credit or even second mortgages. Such loans are based on the amount of home equity, or the value of your home minus the amount still owed. Your home is used as collateral and failure to make timely payments can result in losing your home.

Other types of secured loans include debt consolidation loans where a home or personal property is used as collateral. Instead of having many –usually high interest– payments to make each month, money is loaned to pay the original lenders off, and the borrower then only has to repay the one loan. This is not only more convenient but it will also save a lot of money over time, since interest rates for secured loans are lower. A debt consolidation loan usually offers a lower monthly payment as well.

On the other hand, unsecured loans are the opposite of secured loans and include things like credit card purchases, education loans, or bank notes, which usually demand higher interest rates than secured loans, because they are not backed by collateral. Lenders take more of a risk by making such a loan, with no property to hold onto in case of default, which is why the interest rates are considerably higher. If you have been turned down for unsecured credit, you may still be able to obtain secured loans, as long as you have something of value or if the purchase you wish to make can be used as collateral.

Why Secured Loans
Banks like secured loans, in fact, many of the banks prefer secured loans over those unsecured loans. There are a number of different reasons why banks prefer secured loans.

With an unsecured loan, the borrower will have to pay more money than they would be paying with secured loans for the principle amount. One reasons why banks could prefer to have unsecured loans over secured loans is because the unsecured loans tend to be higher in interest rate which means more income for the bank. However, this is not true. From the borrowers prespective, if you look at a secured loan and you compare it with the interest rate of an unsecured loan, you are going to see that the secured loan is better than the unsecured loan.

Whenever a bank lends money it is putting itself at risk. The risk basically centres on the borrower’s not paying back the loan (default risk). When a borrower does not repay a loan the bank in essence looses. Banks will normally try their very best to recover the amount including going through the courts. This tends to costly for banks and in a number of cases it ends up costing them more money than they would want to spend with the end result being no profit from the initial loan. Thus banks tend to greatly prefer secured loans as the risk is greatly reduced.

Thus one of the main reasons why secured loans are preferred by banks is that the borrower owns the assets that is given as security and is more than likely to make their monthly payments. The borrower makes these payments because they do not want to lose their assets especially if it is a home that they live in. Also if the borrower defaults on the loan, the bank can recover their funds by disposing of the asset.

Also when banks issue secured loans they are able to offer their customers lower interest rates. When banks offer these lower rates the borrowers are more likely to repay and when they repay the bank gets their profit.

Secured loans also give banks the confidence to safely issue more loans at lower rates which in turn means more profits.With a secured loan, there is something forcing you to pay back that loan, but this is not true with unsecured loans. The truth is that many individuals like to take advantage of those unsecured loans and never pay it back, which means the bank will lose money. By taking a security banks eliminate this likelihood.

Secured loans are much easier to get and also easier for banks to issue as they are assure that they will not lose their money and will actually make some profit from the loan.

Why should I take out a secured loan?

There are many reasons for taking out a secured loan from debt consolidation to freeing up money for home improvements, which especially makes sense as you are adding to the value of the house.

As explained earlier, a secured loan is easier to obtain than an unsecured one. This makes it an appealing option if you are self-employed, have recently changed jobs, have an adverse credit history or any other circumstances that would decrease your chances of taking out a personal loan.

Secured loans also offer a level of flexibility that unsecured loans cannot. With an unsecured loan you can borrow, at most, $25,000 but with a secured loan you can borrow as much as $100,000. The term on a secured loan is much longer than an unsecured one, from 3 to 25 years as opposed to 6 months to 7 years.

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