A secured personal loan is a type of loan that requires the borrower to put up an asset to act as collateral until the loan is paid in full. One of the advantages of secured loans is that the terms might be favorable, because the lender faces less risk. The downside is that if the borrower defaults on the loan, they could lose the collateral they put up to secure the loan.
Common secured loans are home mortgages and car loans. If you default on these types of loans, the lender could repossess your home and/or vehicle.
What’s the Difference Between a Secured Loan and an Unsecured Loan?
Unlike a secured loan, an unsecured loan does not require the borrower to put up any collateral. Borrowers may need to have a good credit score in order to qualify, although some companies will lend money to borrowers with bad credit.
If you are taking out a car loan or home mortgage, that will serve as your collateral. But you can also take out a secured loan by putting up something you already own, such as savings or certificates of deposits. You can also take out a title loan by putting up your car as collateral.
There are also secured credit cards that act as a secured loan. To use the card, you first need to make a deposit against the card limit. This acts to guarantee the loan, with the money you deposit serving as the collateral. Secured credit cards are a good way for people with bad credit to improve their credit score.
Where Can I Find a Secured Loan?
There are a wide variety of places to find secured loans, including banks, credit unions and online. To qualify for a secured bank loan, borrowers normally need to have a good credit score. The bank will also want to see proof of income to ensure you will be able to repay the loan, and that you don’t have too many other outstanding loans. If you have bad credit, you’ll have a better chance getting approved and obtaining a more favorable rate by borrowing from a credit union.
There are also several online lenders that make secured loans. The credit score requirements, repayment terms and APR will vary by lender, so pay attention to these factors to make sure you are getting the right loan for your needs.
When is a Secured Loan a Good Option?
Secured loan put the borrower at risk for losing their collateral if they default on the loan. However, they are a good choice for someone trying to rebuild their credit, looking for a low-interest rate loan, or making a major purchase – such as a house or car. Otherwise, you are probably better off taking out an unsecured loan.
Disclaimer: This is not legal or financial advice. Please consult a legal or financial advisor for your specific situation.