Secured Loans

In the realm of lending, there are two primary types of loans: unsecured loans and secured loans. As the names imply, either you sign and take the money or you provide the lender more than your personal guarantee to repay. Before you decide which way to go, know that there is more involved than simply making the lender feel safe in their lending decision.

Basics of secured loans

Banks like making secured loans because there is less risk to them. The item you use to guarantee the loan is called collateral. As a rule, lenders expect the collateral’s value to exceed the amount of the loan for the term of the loan. This is why auto secured loans require you carry full coverage insurance on the vehicle for the life of your note. They want to ensure they receive their money even if something happens to the car.

While it is not always the case, secured loan rates are typically lower than unsecured loan rates. Again, this is a function of the decreased risk to the lender being passed along to you in the form of savings.

Kinds of secured loans

Mortgages and auto loans are the two most common kinds of secured loans, but any loan offering collateral in exchange for the funds is a secured loan. Some lenders accept stock certificates, retirement accounts and even insurance policies as collateral as long as your plan or policy does not specifically prohibit it. You can also secure a personal loan for business purposes with business equipment because it has a tangible value attached to it.

Jewelry, artwork and rare coins are less common collateral options, but options nonetheless.

What happens in default

As with any lending obligation, there are consequences for failure to repay secured loans. In addition to the default showing up on your credit report and adversely affecting your credit score, foreclosure or repossession can occur. If, for example, you used your truck to secure your loan and stop making payments, the truck is legally property of the lender. You receive notice to surrender the vehicle, but if you don’t comply within a specified amount of time, someone will come to take the vehicle from you. In the case of home foreclosure, you must vacate the premises within a certain period of time or your things are placed on the lawn and locks are changed.

Only you can determine if secured loans are the best option for your financial needs when choice exists. So long as you understand the rules going in and make your payments on time, using collateral to secure your loan can save you hundreds or thousands of dollars over the life of the loan compared to using unsecured loans.

Source: http://www.superpages.com/supertips/secured-loans.html

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