Easier qualifying is one of the key benefits of secured loans. This can be of key importance when you need cash for an emergency situation quickly and your credit score is less than optimal. With that in mind, it’s always good to ask some key questions before you make any financial commitment. So, what exactly is a secured loan? What are the risks involved? How are secured loans different from unsecured loans? Read on to find the answers to these questions and more.
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What is a Secured Loan?
A secured loan is a type of credit which is backed by your pledge to surrender an asset of greater value than the loan amount if you default on the loan. The pledged asset is commonly referred to as collateral. Auto and home loans are two of the most common types of secured loans. The collateral offered is most often based on the type of loan. For example, an auto loan is secured by the car you’re buying, while a home loan is secured by the property you’re purchasing.
Meanwhile, unsecured loans are supported only by your credit history, income, and your promise to repay them. Unsecured lenders focus on your creditworthiness, income and debt-to-income ratio when making lending decisions. Common types of unsecured loans include credit cards, personal loans and student loans.
What are the Advantages of Secured Loans?
Because they are backed by collateral, secured loans offer a number of key advantages over unsecured loans for borrowers. Secured loans are usually easier to get, have comparatively lower interest rates and are typically funded for higher amounts than unsecured loans.
- Lower Interest Rates - Because collateral reduces risk to the lender, secured loans usually carry lower interest rates.
- Higher Loan Amounts - Lenders are often willing to green-light larger loan amounts when an asset of greater value than the loan is pledged.
- Easier Approval - Because your collateral protects the lender, secured loans may have more flexible eligibility requirements and can offer easier qualifying.
- Credit Building - Making on-time payments on a secured loan can help you build your credit.
- Longer Repayment Terms - Many secured loans, such as mortgages and auto loans, offer longer repayment periods, which can lower monthly payments.
- Potential Tax Benefits - For certain secured loans, like home-equity loans and mortgages, the interest you pay may be tax-deductible.
Key Risks and Considerations of Secured Loans
Secured loans can present significant risks when managed poorly. This is why it is important to honestly assess your ability to make loan payments and understand potential long-term costs. Considerations to make before applying for a secured loan include:
Foreclosure / Repossession - The lender can seize your pledged asset and sell it If you fail to make the loan payments as agreed.
Potential Credit Score Damage - As with any type of debt, late payments or defaulting can hurt your credit and could lead to actions like non-payment lawsuits, court judgments or debt collection.
Interest Concerns - While secured loans often feature lower interest rates compared to unsecured loans, interest charges accumulate over longer repayment periods, which can make them more costly over the length of the loan.
Potential Restrictions - Some lenders place restrictions on the usage of secured loans. For example, a secured car loan must be used to purchase a car. Similarly, the funds from a secured home loan must be used to buy or refinance a house. Lenders also frown upon the use of secured personal loans for gambling or speculative investing.
Choosing the Right Secured Loan
It is important to compare loan offers, as well as read and understand loan agreements, before signing on a dotted line. After all, you could be forced to give up your collateralized asset if things go awry. Key factors to consider include:
- Interest Rates and Fees - Compare interest rates closely, minor differences can add up over time. Review all costs and any prepayment penalties.
- Reputation and Credibility - Choose a lender with a solid reputation supported by positive reviews, proper licensing and a history of fair practices.
- Loan Terms and Collateral - Evaluate the terms such as repayment periods, loan-to-value ratios, payment frequencies and collateral requirements. Look for flexible options and make sure the loan meets your purpose.
- Customer Service - Prioritize lenders that offer responsive, clear support during the application process and repayment. Pay close attention to online reviews, as well as the feeling you get when you contact them for information about their products.
The Bottom Line
Understanding the difference between secured and unsecured loans can help you decide which type of loan is best for your needs. If you need cash quickly and your credit is less than ideal, a steady income and an automobile in your name can be enough to qualify for a car title loan. Because these loans are secured, poor credit is not usually a barrier to getting approved.1 You can also keep your car and use it normally, as long as your payments are on time. With title secured loans serviced by LoanMart, you can also expect excellent customer service, as well as fast decisions and funding. You’ll also find interest rates that are competitive to similar types of loans.1 Apply for your title loan today!
