What are Secured Loans?
Secured Loans also known as ‘Secured Credit Lines’ are a type of credit line that holds a hidden type of asset. This could be deposits you put down such as a property or any other resources that has monetary value involved.
Consumers who takes secured loans agrees to a reimbursement plan. Which means, the assets(Car, Apartments) they own and utilise are on the line. In the event of a breach in agreement, all assets will be seized by the financial institutes as reimbursements.
Secured Loans are normally viewed as ‘lower-risk’ for the lenders as they have seizable assets in the occasion the borrower fails to pay the credited amount. Thus, Secured Loans have lower financing costs than Unsecured Loans and are easier to be approved.
Types of Secured Loans
Pros of Secured Loans
Lower interest rates - Secured loans come with collateral, hence it is less risky for the lender. Therefore, lenders charge lower interest rates for secured loans – often much lower rates. If you have a good credit history, a solid income and valuable collateral, lenders might even compete to lend you money. Mortgage lenders do this all the time, allowing borrowers to search for the best terms.
Larger loans - Secured loan amounts can be much larger with lower interest rates. It still depends on risk. If the lender has collateral available in a default, the risk of lending is lesser. The maximum amount available on credit cards is weaker, by comparison.
Better terms - Secured loans often come with longer repayment periods. Home loans, are an example which allows borrowers to repay a loan over 30 years. As for the lender, this makes sense since real estate usually appreciates in value, adding to the collateral as the loan is repaid.
Build your credit - Repaying a secured loan punctually and in full increases your credit rating, making better terms such as lower interest rates the next borrow.
Things to look out for
Loss of Asset - The biggest downside to a secured loan is you could lose your possession . It’s a far larger concern if it’s your house, car or boat. The lenders are allowed to seize your property whenever you stop making payments, even if you’ve owned the property for a long time and have made many payments in the past.
Credit Damage - Failure to make timely payments damage your credit rating and your ability to borrow money .