A secured loan is one in which a bank or lending institution is relatively assured that you will meet your financial obligations and repay the money loaned to you. The financial institution gets this assurance from the fact that the money loaned to you is secured against collateral of some sort—be it property, cash or a cash equivalent. Such loans that leverage your assets are also known as collateral loans.
How a Secured Personal Loan Works
A secured personal loan is one in which the borrower puts up collateral (property, cash or a cash equivalent) to secure the loan amount. In the event that the borrower defaults or fails to repay the loan, the financial institution has the right to take possession of that collateral property and sell it in order to cover some or all of the original loan amount.
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A prime example of collateral is real estate. Financial institutions that provide mortgages require that the house itself be used as collateral. The same applies if you receive a home equity line of credit (HELOC) and happen to fall behind in payments. After a predetermined length of time in default, the bank can take your home and sell it in order to recoup some of the money lost that you were unable to repay. Other types of collateral can include boats, vehicles, government securities, certificates of deposit, cash, bonds, commodities or metals.
Types of Secured Personal Loans
Many of the loans available today are in fact secured personal loans. These include money loaned for new large item purchases, such as houses or cars, and loans made against property you already own such as a HELOC. Any time property is included in a loan transaction and is used as collateral, the personal loan is a secured one.
Types of secured loans include:
Auto loan (new and used)
Loans against your lien-free auto (Title loan)
Loans against your CD or savings account
Recreational vehicle loan
Home Equity Line of Credit (HELOC)
How Much Can You Expect to Get with a Secured Personal Loan?
The amount of money you might qualify for with a secured personal loan mostly depends on the value of the asset(s) you have to offer as collateral. Lenders use the value of the property as a benchmark, so that if you fail to repay as agreed, when they sell the property they’ll be more likely to at least recoup their losses.
Other factors that will have an effect on the amount the lender decides to give you include your credit history, income and ability to repay the loan.
Advantages of Secured Personal Loans
A secured personal loan can offer a number of advantages over other types of loan options. These include:
• Lower interest rates: The fact that you leverage your personal assets can often mean lower interest rates than with a non-secured loan that doesn’t include any collateral. A secured loan is a safer bet for the lender, making lower interest rates more likely to be included as well.
• Ideal way to get large sums of money: Because of the risks involved, most lenders won’t release larger amounts of money unless the loan is guaranteed with property. Lenders realize that when you put your home on the line you are much more likely to repay the loan.
• Higher borrowing limits and longer repayment terms: Because of the “security” that they offer the lender, secured personal loans tend to yield higher credit limits as opposed to unsecured loans, as well as more flexible and longer lasting repayment terms.
• Less attention paid to credit history: Because they are secured with collateral, lenders often do not look as closely at your credit history, which means you are more likely to qualify for a secured personal loan, even if you have less than stellar credit.
• Good credit holds a lot of weight: If you have exceptional credit, a secured personal loan may still be beneficial to you and can enable you to obtain more money than you would with an unsecured loan. When it comes to a HELOC, some lenders may extend loans above and beyond the value of the property. The combination of excellent credit and collateral shows the lender that you are a good risk and are likely to repay the loan.
• Job history not as closely scrutinized: When you offer up collateral with a secured personal loan, the lender may not look as closely at your work history. For instance, if a job loss and a period of no work prior to finding a new job caused you to require a loan, this fact may not weigh as heavily against you as you might expect.
Disadvantages of Secured Personal Loans
As with any type of new debt, there are always some disadvantages that come along with taking out a secured personal loan. The obvious least desirable consequence of a secured personal loan is the fact that you will lose your property if you default on the loan.
While the loss of some property, such as a boat, would be unfortunate, having to relinquish your home could be devastating. For this reason it’s imperative that you think long and hard before putting up your property as collateral. Ensure that you will be able to repay such loans before signing.
Using collateral in the form of a CD or savings account means that the money is unavailable for your use until you pay off the loan. For this reason, it is advisable to not use your emergency savings or other money that you may need to use during the life of the loan.
Who is Eligible for a Secured Personal Loan?
Just about anyone is eligible for a secured personal loan, but the type of loan you receive and the amount will vary, depending on the collateral. For instance, if you don’t own a home, you obviously aren’t eligible for a HELOC. Because of the depreciation of items such as cars and recreational vehicles, using them as collateral isn’t always possible. Some lenders require a backup savings account or CD in order to be eligible for a loan.
Steps to Obtaining a Secured Personal Loan
1. Inquire at your bank or credit union
Find out If the banking institution you already use offers secured personal loans and what their requirements are in terms of necessary collateral. Also ask about the amount of money you can expect to get if you apply. If what they have to offer is not suitable for your needs, try inquiring at a variety of competing brick and mortar or online banks and credit unions.
2. Carefully assess your financial situation.
Keeping in mind the seriousness of taking out a secured personal loan and the consequences if you default, analyze your financial situation closely. Do you truly need the loan money? Will this debt actually help you? Risking your home or other property is not advisable if you’re going to use the funds for discretionary spending.
Also do the math and figure how much money you really need. Just because the bank offers you a certain loan amount doesn’t mean you have to take it all. Obtain the least amount necessary, which will make repayment easier and minimize the amount of interest you pay.
3. Choose your lender prior to applying.
Each financial institution where you apply will check your credit, which tends to affect your credit score because each inquiry will then show up. Be sure of where you want to apply before doing so rather than applying with numerous organizations hoping that one of them will work out.
Additional Secured Personal Loan Considerations
Before obtaining a loan, also consider the following:
• Check that the loan amount is what you requested: Avoid accepting more money than you need, as lenders can charge substantial fees for secured personal loans, and you only want to pay fees for money you truly need.
• Most secured loans include a payment protection plan: This payment insurance policy saves you from having to make payments in the event that you become ill or lose your job. While this may be beneficial to some, such a protection plan costs extra money, so weigh your risks carefully before signing on for this additional expense.
• Be prepared and know the consequences of taking out the loan: Read the fine print and discover the answers regarding risks and penalties before you finalize any loan offer. What are the costs of late payments? What other fees are associated with the loan?
• Other questions to consider: What are the consequences of missed payments? At what point is your collateral at risk? Are there hidden fees? What happens if you fail to pay back the loan and your collateral is seized and sold, but the sale of the collateral doesn’t cover the cost of the loan? Will the lender obtain a deficiency judgment against you for the remaining amount, as is done by some lenders?
Secured personal loans offer an effective means of meeting your financial goals, but they also come with their risks as well. Knowing how they work and what they entail helps you decide if this method of borrowing money is right for you.