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What are Secured Loans?
Secured loans are a form of debt where you get a cash loan for securing an asset, generally a home or a vehicle. It means that if a borrower defaults on the loan, then the lender can sell off the secured asset to acquire his money.
A secured loan is also referred to as a homeowners loan. For example, if you want a secured loan of £20,000, you will have to put down your home as a security for the lender and pay monthly installments plus interest to keep your home. If you default, the lender can get a court order to sell the asset for recovery of the loan.
How Does a Secured Loan Work?
In technicality, a secured loan is nothing different from a regular loan. The borrower has to pay a monthly installment with a certain percentage of interest until the loan is paid off to the lender. The only difference is that you secure a valuable asset with the lender until he recovers his loan.
If you default on the monthly payment, the lender has the right to sell or hold your security to recover his money. Since you are providing the lender with security, the interest rates on these loans are generally lower than unsecured loans. Typically, a secured loan has an interest rate of between 3-6 %, depending on the borrower’s creditworthiness and the asset’s value backing.
Types of Secured Loans
There are different types of secured loans provided by lenders in the market. Some of them are as follows:-
Loans, where the secured asset is a home or property, is called Home owner loan. It is usually taken for borrowing large sums of money. It is the most popular form of secured loan. A homeowner loan allows you to borrow money over £25,000. These loans are long-term in nature and have a repayment period of 3 to 25 years.
A logbook loan is one where you provide your vehicle as a security. Although you can use your automobile, the lender becomes the vehicle owner and can acquire it if you default payment. It has a higher interest rate and is given for a shorter duration.
Here, the loan money is generally used to purchase a new vehicle. The security item, in this case, is nothing but the new vehicle itself.
These loans are taken to buy a property or an asset while waiting to acquire finance from another source. It is a widely popular financing option in the real estate industry. One can either secure a house or any other asset as a security.
Borrowers take this loan to pay off their current debts and secure a home or a vehicle. Opting for a consolidated debt can help them to reduce the number of their monthly repayments.
Benefits of a Secured Loan
If you are aware of your financial needs and risk-taking capabilities, you may be able to enjoy the benefits provided by a secured loan.
- Lenders are willing to give you more significant sums of money than an unsecured loan.
- A secured loan can be for a period of up to 25 years. These loans are usually given out for longer durations, making it easier to make the monthly payments.
- Since an asset secures the debt, lenders overlook a bad credit rating. It is easier and faster to get approval for a secured loan.
- Secured loans typically have a lower interest rate than the alternatives in the market.
Disadvantages of a Secured Loan
- Secured loans have a more significant risk factor. If a borrower fails to pay the monthly installment, she risks losing the security asset.
- A secured loan is more expensive than a regular debt since it can go on for longer. It might take the pressure off you by reducing the number of monthly payments, but you are likely to end up paying more interest than you usually would.
- A significant downside to a secured loan is that even if somehow you now have enough money to pay the whole loan amount, you would be charged extra for paying off the debt before it is supposed to be paid, making it more expensive than it already is.
- Secured loans generally have a variable interest rate to them. These interest rates keep fluctuating, and hence you can end up paying a lot more than you anticipated.
Things to Keep in Mind
A secured loan can be a powerful borrowing instrument that one can use to repay previous debt, buy a new property or a new asset. These loans are given out by banks, online lenders, and even credit unions. It is crucial to ensure whether or not a secured loan is the right option for you.
- The asset you are going to secure against the loan
- Whether the interest rate is set or variable is a factor to consider
- If the interest rate appropriate
- Whether you have compared all options in the market and chosen the one that suits you best
- Your creditworthiness and income
- Extra fees or charges that might be applicable
Since a secured loan also requires heavy paperwork and other formalities, you should ensure that you are thorough with all the details regarding the same so that you are not surprised later down the road. To clarify whether you should opt for a secured loan, you should ask yourself questions like how much money you need, whether you have an asset to secure, your financial situation, and your credit score.
Difference between a Secured and an Unsecured loan
An unsecured loan is a form of debt where money is lent on other factors like credit score, application, and stability of income, and no other assets are used as security. Unlike secured loans, unsecured loans are harder to get and often have a higher interest rate.
If you fail to repay the loan, an unsecured loan does not put your assets at risk instead harms your creditworthiness for future loans.