Secured loan definition
What is a secured loan?
A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral for the loan, which then becomes a secured debt owed to the lender. The debt is thus secured by the collateral, and if the borrower defaults, the lender may seize and sell the asset to repay the debt.
What are the benefits of a secured loan?
The benefits of a secured loan include:
-Lower interest rates: Because the asset secures the loan, lenders are more willing to offer lower interest rates for a secured loan than an unsecured loan.
-Greater borrowing power: Borrowers can usually qualify for a larger loan amount with a secured loan than an unsecured loan.
-Flexible repayment terms: Lenders may be more flexible with repayment terms for a secured loan than an unsecured loan.
-Builds credit: Making regular payments on a secured loan can help build your credit history and improve your credit score.
What are the risks of a secured loan?
There are a number of risks associated with secured loans, the most notable being your home or property could be repossessed if you fail to make repayments on time. This makes it essential that you carefully consider whether you can afford the repayments before taking out a loan.
Other risks include:
– You could end up paying more interest than you would on an unsecured loan, as the lender will likely offer a lower rate to offset the risk of repossession.
– If you miss payments, your credit score will suffer and it could become more difficult to obtain future credit.
– If you use your home as security for the loan and then sell it, you may have to repay the loan in full even if the sale price is less than the outstanding balance.
How to compare secured loans
To compare secured loans, you need to look at:
– The APR: This is how much the loan will cost you over the course of a year, including interest and other fees.
– The term: This is how long you have to repay the loan.
– The amount: This is how much money you can borrow.
– The lender: This is who you borrowed the money from.