Would You Benefit From a Secured Loan?
In the expansive world of financing, there are plenty of creative methods of loans, each unique and advantageous in their own right. Secured loans are among these alternative loan methods that differ from the traditional way of lending. Can you benefit from a secured loan? Here, we’ll jump into what a secured loan process entails and how it could be beneficial depending on your financial situation.
What’s a Secured Loan?
The definition of a secured loan revolves around the requirement that you pledge an asset as collateral, such as your property. If you default on your payment or miss a payment, the lender can seek reimbursement by collecting the payment in the form of the collateral at stake.
While it may seem like a big gamble, you’ll be able to build credit if you seek out a secured loan from a bank or credit union. If you’re a steady, by-the-book borrower, you can enjoy a typically lower interest rate than a traditional loan. The interest rate is generally lower with a secured loan because the lender has less of a risk collecting since the collateral is physical and therefore easier to obtain if default were to occur.
There’s more than one type of secured loan out there for you to consider:
Mortgage: perhaps one of the most common versions of a secured loan is a mortgage because if you were to default on your home mortgage, the bank will foreclose on your house and collect it back as collateral.
Car loan: if you think about a mortgage and if you miss a payment on your house, the bank forecloses and the home returns to their hands, a car isn’t so different. If you default on your car loan and begin missing payments, the car becomes collateral and the lender will repossess it.
Title loan: a title loan offers up the title of your paid-off vehicle as collateral in order to obtain another loan for something else. Should you miss payments on this new title loan, the title of your paid-off car becomes the collateral to make up for it. Title loans are known for their high interest rates.
Secured credit cards: if you have bad credit and are trying to improve your score and put your poor credit history behind you, a secured credit card is an excellent way to help you do so. A secured credit card is a little like a secured loan. The bank lender will require a deposit against your new card’s limit, which guarantees the loan and acts as collateral, thus securing it if you default.
Why Use a Secured Loan?
People who use a secured loan are sometimes coming out of a tight financial spot or trying to escape their history of poor credit or low credit scores. They could have also been denied for unsecured loans. A secured loan can allow them to build their credit score, regain their financial footing and the lender stands protected. All parties win if the loan is followed through correctly.
Banks and lenders also prefer secured loans because there’s less risk involved. If their borrower misses a payment or neglects the loan, the collateral is physical and can be obtained in easier manner than a traditional loan. Thanks to this, lenders can offer the lower interest rates that are so often attached to secured loans. This is good news for a borrower trying to build their credit.
If you’re in the position of building credit to achieve a higher credit score or to wash away a history of faulty and poor financial situations to start anew, then a secured loan is the way to do it. What’s important to remember is what your using as collateral because that’s what is at stake should you miss your payments on this secured loan.
A tip before you contract yourself to a secured loan - make sure you pay in a timely manner in order to see a changing difference in your credit score. Also, be careful about what you use as collateral, because if you miss payments, your lender won’t hesitate in seizing it.
Potential Risks & Disadvantages of a Secured Loan
Just with any loan, a secured loan is going to have certain risks on the behalf of the borrower. In the same fashion you’d take with every loan you take out, doing your research on the pros as well as the cons is an absolute must. Every financial situation is different - unique, like a thumbprint - and there’s no definitive source except for you to know if a secured loan is right for your financial needs.
The obvious disadvantage and risk a secured loan carries is the exact thing that makes it a secured loan: the securing collateral. If you know your financial habits well and could estimate that you’ll be on track and set to make timely payments to fulfill your loan requirements, then this isn’t something to worry about.
However, if you have a history and habit of missing payments, then take a minute to realize that you’re going to be putting up your house, your car or your title as collateral. If you miss your payments, your lender won’t pause for excuses and will seize it as payment instead. Knowing these risks before you go into a secured loan will better set yourself up for successful payments and establishes a healthy relationship with your lender. Plus, if you make your payments, you can keep you house.
Some people are drawn to a secured loan if they have unsecured debt that they need to pay off. For example, many borrowers will take out a second mortgage to pay off lingering credit card debt, or pursue the route of a title loan in exchange to pay off bills. These are dangerous waters to tread, and if you’re slammed with unsecured debt, taking out a secured loan to pay it off won’t be doing you any favors in the long run. In fact, based on this tricky financial situation, there’s a good chance you could lose everything.
It’s better to avoid taking out a secured loan in cases such as these because you can strive to protect your assets and work towards paying off the unsecured debt with a second job by means of additional income. You can even find a lender via a credit union or small bank for an unsecured personal loan to help lower the interest rates on your credit cards.
A Secured Loan for Traditional Borrowing
Secured loans really take their shine in the traditional sense: a mortgage or a car loan. The collateral is the property or vehicle you’re purchasing. The transaction between lender and borrower is simple, often with lower interest rates, and it’s so common, that people don’t even realize that they’re pursuing a secured loan. Secured loans for those with healthy financial habits are a staple for those making big life purchases.
Secured loans get a little hairy when you’re desperately trying to pay off other debt with it. It’s a much better idea to tackle your debt in a straightforward manner, and to seek out help from an advisor or your trusted lender if you’re feeling overwhelmed by debt.