Loans, including personal loans, are typically classified as secured or unsecured. Secured personal loans can help borrowers obtain much-needed cash or make large purchases, such as a new home or car, with less stringent qualification requirements than unsecured loans. A borrower can obtain financing while keeping interest rates low by pledging valuable assets. Lenders also face less risk when making secured loans because they can repossess or foreclose on the collateral if the borrower is in default from not paying the previous loans.
What Exactly Is a Secured Personal Loan?
A secured loan is one that is secured by collateral. Mortgages and car loans are the most common types of secured loans, and the collateral in these cases is your home or car. However, collateral can be any type of financial asset that you own. If you fail to repay your loan, the bank may seize your collateral as payment. A repossession can be reported to the credit bureaus for up to seven years.
When you obtain a secured loan, the lender places a lien on the asset you provide as collateral. When you pay off the loan, the lender removes the lien, and you own both assets free and clear.
Types of Secured Loans
Mortgages and auto loans are two of the most well-known secured loans, but several other financing options may require collateral. The following are the most common kinds of secured loans:
- Home equity lines of credit
- Home equity loans.
- Auto loans
- Secured personal loans
- Secured credit cards.
How Secured Loans Operate
Borrowers with secured loans can access a lump sum of cash to cover anything from home improvement projects to purchasing a car or home. Most traditional banks, credit unions, online lenders, car dealerships, and mortgage lenders offer these loans.
Although secured loans are less risky for lenders, the application process generally requires a hard credit check—though some lenders allow you to prequalify with only a soft credit inquiry. Also, just like with other loans, interest is added to secured loan balances, but borrowers may be able to get lower annual percentage rates (APRs) than with unsecured loans.
When a borrower meets the requirements for a secured loan, the lender places a lien on the borrower’s collateral. To improve the lender’s chances of recovering its funds, the collateral value should be greater than or equal to the outstanding loan balance. If the borrower defaults on the loan, the lender has the right to seize the collateral.
Are Secured Personal Loans Easier to Get?
Most of the time, getting a secured loan is easier than an unsecured loan because the lender has less to lose. Even if you have bad credit or none at all, you might still be able to get a personal loan if you have something to put up as collateral.
Most secured personal loans also let you borrow more money, making getting the cash you need easier.
A secured loan may allow you to obtain lower interest rates than an unsecured loan. Because secured loans pose less risk to lenders, they may be easier to qualify for. Borrowers can deduct interest payments on secured loans, such as mortgages, from their taxes. If you want a secured personal loan, visit Heritage Financial Credit Union today.