You may be faced with a lender who needs you to guarantee the loan to access the cash needed for major purchases or payments, which is very common in the lending world.
Through a secured loan, lenders can ensure that it will cover all installments because something of value is involved in the borrower’s interest.
What exactly is a secured loan?
As the name implies, it is a loan secured by an asset such as a cash account, real estate or an automobile. They can also use valuable investments or collections; they must have a monetary value commensurate with the loan requested.
In this way, if the borrower defaults on the loan, the loan holder can repossess, foreclose and seize the secured asset to recover the outstanding balance due.
The entire process is recorded in a contract to ensure that the borrower’s word will be honored. Secured lenders take less risk in offering their services, and for this very reason, their interest rates and requirements are lower.
Why do lenders opt for secured loans?
The answer is simple: they need to secure their money. When the borrower puts up something of value to him as collateral, he offers assurance that he will make all payments on time to avoid losing it.
This type of loan is common when they are very high amounts that they do not want to risk losing all the money borrowed because the borrower claims to be unable to pay it back.
Main differences between secured and unsecured loans
Starting with approval requirements, for secure options, there are fewer requirements regarding credit history and credit score than unsecured loans.
In addition, interest rates are noticeably lower when there is average collateral than when there is no collateral.
There are also more negative consequences for defaults because by securing an asset, the lender can mortgage or repossess it when it becomes delinquent.
Along with repossession, the credit score will also go down. Conversely, when loans are not secured, the lender turns the case over to collections which notify the credit companies and downgrade the score. The situation does not usually go any further.
Secured loans include auto loans, home equity lines of credit, secured personal loans and secured credit cards. For the unsecured ones, users can opt for unsecured credit card loans, student loans, and personal loans.
How these loans work
When contacting a lender, he will indicate the procedures to access the cash requested. When working with secured loans, he will ask for the amount to be requested and give the collateral options he accepts.
After reaching an agreement with the collateral, it will be time to make the contract. You will notarize this document to validate each of the clauses fully. The day of signing will be agreed upon and will give the total cash at that moment.
They are generally used for home improvement projects, car purchases or home acquisition. This loan is provided by traditional banks, credit unions, car dealers, online lenders and mortgage lenders.
This alternative is less risky for lenders. However, the credit check will still be strict in most cases. When money is needed, the recommendation is to find a lender that only requires a soft credit inquiry.
Collateral typically accepted by lenders
Generally, the collateral requested is related entirely to the amount and purpose of the loan requested. The most common options are:
- Real estate such as homes, commercial buildings, land and equity in real estate
- Bank accounts such as checking accounts, savings accounts, certificates of deposit accounts (CDs) and money market accounts
- Investments such as stocks, mutual funds, and bonds
- Insurance policies, such as life insurance
- Vehicles ranging from cars, trucks and SUVs to motorcycles and boats
- Other valuable assets such as precious metals, coins, and collectables
- Machinery, equipment, inventory and other business assets
Types of secured loans
The most recognized are mortgages or vehicle loans. However, there are more types than most people are aware of. Some common loans of this type in the marketplace include:
Home equity lines of credit.
It is a revolving loan secured by the borrower’s equity in the home. The funds acquired can be used by the borrower as they are needed.
Mortgages are the method best known to most people in the country. Simply put, it is a loan used to finance a home or real estate when you do not have the money required. The lender will have the right to foreclose when you default on the loan.
Home equity loans
This is an option secured by the equity in the borrower’s home. With this loan, the applicant will receive a lump sum of cash on which interest will begin to accrue from the time of purchase. It is an alternative similar to a Home Equity Line of Credit.