If a reasonable cost is the trait of an ideal loan for you, secured debt can be your best solution. Secured loans can also be a great option for people who want to access a larger loan amount. However, knowing the answer to the question “How do secured loans work?” is crucial to make an informed financial decision.
Generally, a secured loan is a kind of financial assistance that obliges a borrower to provide collateral. This pledge works as a guarantee that the borrowed amount will be repaid on time. If the borrower is unable to make on-schedule payments, the lender has the right to seize the collateral to recoup its losses. For a better understanding of the secured loan nature, let’s delve deeper into their specifics and explore how to make the most of your collateral-backed form of debt.
What Is a Secured Loan?
When you need to borrow money, there are two types of loans that you can access: secured and unsecured. A traditional personal loan, for example, is a form of an unsecured loan with no collateral needed. But a secured loan requires you to put up a pledge against the loan. Thus, we can say that secured debt is a collateral-backed form of financial assistance that a borrower can get against the estimated price of their valuable assets.
You can get a secured loan from a bank or credit union, a mortgage lender, or other financial institutions. Some types of secured debt can even be offered by alternative online lenders and various connecting services. However, secured loans are not created equally. Their terms can vary widely from lender to lender.
How Do Secured Loans Work?
A secured loan doesn’t differ much from other forms of debt. Everything starts with determining the needed amount and the type of loan you can access. In most cases, this will be defined by the kind of property that you can pledge. Once you choose the loan to apply for, a lender will appraise your asset to determine its value. Most loans can provide you with up to 90% of your property’s estimated price.
After the collateral has been valued, the borrower can complete the application process. This typically involves providing personal and financial information, which includes your full name, proof of identity, income confirmation, employment status, credit score, and more. After you submit your application form, a lender runs a credit check to ensure that you’re eligible for a certain form of assistance. If you can qualify, a lender will make you a loan offer that reflects the loan terms. You need to review your potential loan documents and make sure all the conditions are good for you.
Once the loan terms have been agreed upon, you will be asked to put up collateral. Depending on the loan type, you may be asked to transfer ownership or provide the lender with a lien on the asset. After the deal is done, you can use your loan funds toward your needs. Also, you become responsible for making on-schedule loan payments. After you repay the loan in full, the collateral will be returned.
What Can Be a Collateral for My Secured Loan?
Collateral is any of your valuable assets that a lender can use to recoup losses if a borrower fails to repay the loan. However, not all properties can be used as a repayment guarantee. As collateral serves as a safety net for the lender, it should be easy to take advantage of. The most common forms of collateral are vehicles, houses, stocks and bonds, and account balances. The lender has the right to seize the collateral to recover their losses.
Are Secured Loans Easy to Get?
Secured loans may have more lenient requirements than unsecured ones. This is because a lender has a repayment guarantee that it can use to offset the risk of non-payment. Thus, secured forms of debt can work for borrowers with any credit history. This makes them easier to obtain than unsecured loans.
But don’t let this fact twist you around the finger. Although secured loans have more relaxed eligibility criteria, you still need to meet lenders’ minimum credit score requirements and demonstrate a high income. You also need to provide a pledge and a set of documents to apply.
Also, it should be noted that some forms of unsecured debt can be easier to get than secured ones. Multiple services like 15M Finance can provide financial assistance for people with less-than-perfect credit scores without asking for any collateral. These loans are available online through convenient platforms and can be obtained in a matter of minutes. But keep in mind that the lower your credit score, the worse loan terms you should expect to get. Such loans usually come with sky-high interest rates, limited terms, and small amounts.
Secured And Unsecured Loan Comparison
The main difference between secured and unsecured loans lies in the presence or absence of collateral. A secured loan is backed by an asset, while an unsecured loan’s accessibility is based solely on the borrower’s creditworthiness.
The table below compares secured and unsecured loans based on the key criteria:
| Features | Secured Loans | Unsecured Loans |
| Interest Rates | Between 3% and 6% APR for borrowers with good credit. Can reach 36% for those with bad FICO scores | Usually between 6% and 36% APR. Some forms of unsecured debt can come with an annual percentage rate of over 400% |
| Repayment Terms | Typically longer, can reach 20 years for some loan types | Can be as short as one month. Most unsecured loans offer repayment terms of up to 60 months |
| Collateral Backing | Required | Is not needed |
| Credit Score Requirements | Can be obtained with less-than-perfect credit | Require a borrower to have good credit |
| Loan Amounts | Higher, depends on your asset’s estimated price | Lower, depends on your financial situation |
| Risks | You can lose your property in case of default | You will face high late fees if you don’t make your payments on time |
When Should You Take Out Secured Personal Loans?
Secured personal loans can be a good option for people who need to borrow a significant amount and have some valuable property to use as collateral. Here are some situations when taking out a secured personal loan may be a good idea:
- Home improvements. If you’re planning to renovate your home and make it a better place to live, a secured personal loan can provide the funds you need to cover the costs.
- Debt consolidation. If you have multiple high-interest debts, such as credit cards or personal loans, a secured personal loan can be used to consolidate them into a single, more manageable payment. As secured loans are typically less expensive, it will help you reduce the financial burden and save money on interest.
- Large purchases. If you need to make a large purchase, such as a house, car, or boat, a secured personal loan can provide the funds you need. By using the asset as collateral, you may be able to secure a lower interest rate than you would with an unsecured loan.
- Emergency expenses. If you have an unexpected expense, such as a medical bill or a home repair, a secured personal loan can provide the funds you need to cover the cost at a lower interest rate.
However, don’t forget to estimate your solvency and make sure you can afford your loan payments in the long run. Bear in mind that secured loans are too risky to be taken lightly. You should carefully weigh the pros and cons and check out some financial tips before you obtain this debt.
Types of Secured Loans to Consider
Secured loans come in various forms. Each of them is designed to suit different financial needs and reach borrowers based on the type of collateral they can provide. Here are the most common types of secured loans.
Mortgage Loans
A mortgage loan is a type of consumer loan that is used to purchase a home. It’s secured by the property, which serves as collateral. Mortgage loans usually offer up to 100% home financing at reasonable interest rates. The exact amount you can get depends on your income. The repayment terms can be up to 30 years.
Home Equity Loans and Lines of Credit
A home equity loan is a secured personal loan that uses the equity in your home as collateral. This form of debt can be used for multiple purposes, from home improvement to covering tuition costs or starting a new business. Home equity loans offer a lump sum payment, while home equity lines of credit provide access to a revolving line of credit.
Share Savings Loans
Share savings loans are a type of secured loan offered by credit unions. They use the funds in your savings account as collateral, allowing you to borrow at a lower interest rate. The loan is repaid in monthly installments over a set period of time.
Secured Credit Cards
Secured credit cards are a type of credit-builder loan. They are designed for people with bad or no credit and require a security deposit that serves as collateral. The credit limit is usually equal to the amount of the security deposit. Secured credit cards can help improve your credit score if used responsibly.
Vehicle Loans
Vehicle loans are secured loans that are used to purchase a car or other vehicle. The loan is secured by the vehicle, which serves as collateral. Vehicle loans usually have lower interest rates than unsecured debt and offer longer repayment terms.
Auto Title Loans
Auto title loans are a type of secured loan that you can obtain against the title of your car. They are popular with bad credit borrowers who need cash quickly. However, auto title loans have higher interest rates than other secured loan options.
What to Expect If You Miss Secured Loan Payments?
If you miss secured loan payments, your lender will charge late fees and penalties. If you keep paying late, it can also harm your credit score and make it more difficult to obtain a loan in the future. If a borrower defaults on a secured loan, the lender can seize the collateral used to secure this debt. For example, if you default on a mortgage loan, the lender may foreclose on your home.
That is why it’s important to communicate with your lender if you face difficulties making your monthly payments. The lender may be willing to work with you to find a solution. It can offer a loan modification or payment plan to help you avoid default.