A secured loan is a type of loan that is secured or collateralized by an asset of the borrower. The asset may be a real estate property or cash accounts or an automobile or other valuable things. The primary purpose of collateral in this type of loan minimizes the lender’s risk if the borrower fails to repay the loan. On failure of paying the loan till the due date, the lender can seize the asset for recouping the outstanding balance. That is why a secured loan has less risk for the lender, and hence it is available at a lower interest rate than that of the unsecured loan.
How Does the Secure Loan Works?
In a secured loan, the borrower gets a lump sum of cash from the lender. The borrower can use this money for anything and any reason, such as paying medical bills, emergency repair expenses, improving their house, purchasing a home or car, or any other essential things. The borrower can usually take this type of loan from traditional banks, online lenders, credit unions, auto dealerships, and mortgage lenders.
A collateral personal loan is less risky for lenders, but there are still specific loan requirements you need to fulfill. You can check the requirements of each lender and pick the one who offers the best loan terms. Though the secure loan accrues interest just like any other type of loan, borrowers get lower annual percentage rates than the unsecured loan.
What do you Need to Keep as Collateral for Getting a Secure Loan?
The type of collateral that you require to keep for getting a secured loan depends on the purpose satta and amount of loan you had applied for. However, some of the common forms of collateral are listed as follows
- Real estate properties such as homes, commercial buildings, land, and equity
- Bank accounts that include saving accounts, Certificate of Deposit Accounts (CDs), Money Market Accounts, Fixed Deposits, etc.
- Investment paper such as stock, mutual funds, and bonds.
- Insurance policies such as Life Insurance.
- Vehicles like cars, trucks, SUVs, etc.
- Precious valuable assets like precious metals, coins, and collectibles
- Machinery, equipment, inventory as well as any other type of business asset.
Pros and Cons of Secured Loan
The following are some advantages of a secure loan:
- A secured loan is available at a lower interest as compared to that of an unsecured loan.
- This type of loan is easier to get since in this type of loan, the borrower needs to give the collateral, and the lenders are at a lower risk than an unsecured loan.
- The borrower can avail of tax deduction advantages by showing the interest payment that is incurred on the secured loan.
However, the secured loan has some disadvantages as well, and some of the common disadvantages are listed as follows
- If a borrower cannot repay the loan, the lender can repossess or seize or foreclose the collateral that the borrower has kept with the lender when taking the loan
- This loan is less flexible.