What Is A Secured Loan?

By | February 10, 2016

A secured loan is a sum of money, which comes attached with collateral. Under this loan, a borrower has to pledge some asset, for example; a property or a car, as collateral for the loan. The collateral (pledged asset) is a type of security or surety for the loan and the bank or loan providing company can collect it if the borrower defaults or misses the loan payment.

 

One of the most important things about this type of loan is that it is offered at a lower interest rate because the bank here remains at a lower risk, thanks to the collateral or pledged asset surrendered at the time of taking the loan. Besides, a secured loan also works as the best way to build credit score if you go through a reputable lender like a credit union or a bank.

 

How does it work?

 

Before providing you with the loan amount, the bank will undertake a pledge in the form of an assurance over one or more of your assets. This is the asset that is actually purchased using the funds from the loan, thereby, securing the legal right to take possession in the future if you happen to default the same.

 

Types:

 

Following are some of the types of secured loans offered mostly by the banks these days:

 

1)  Title loans

 

A title loan, also known as title pawn in some states, is a type of secured loan. This is considered to be the most convenient and quickest way for people who own their motorcycle or car to get cash. It is very simple to get a title loan or title pawn. As long as you own your motorcycle or car, and possess its lien-free title, you can use it as collateral to get the cash you need.

Under this loan, a borrower has to use his/her vehicle as collateral. The vehicle is returned as soon as the loan is repaid. While you can find an end number of title loan providing banks all over the world, the providers of title loans in Arlington have really carved a niche among the Arlington-based loan-seekers by virtue of their hassle-free mode of secured loan.

 

2)  Mortgages

 

Mortgages are similar to title loans, but under this, the bank agrees to lend money in exchange for taking the debtor’s property.

 

3)  Certificate of deposit

 

CD (certificate of deposit), a form of savings account, can also be used to obtain loans. Under this, you can build a credit history with the bank and proceed with the same.

 

Advantages Of A Secured Loan

 

Like mentioned previously, secured loans are frequently used by some to build a successful credit score. Not only this, but there are also many other benefits of the secured loans:

 

– There is generally less risk involved with the type of lending method.

– Interest rates are comparatively lower than other types of loans.

– They are easier to get without having to go through a tedious process.

 

Pointers to keep in mind

 

While choosing a secured loan, there are certain key things that should be kept in mind, for example;

 

1)  Interest rates

 

The loan should provide a reduced interest rate and amounts that can be switched easily when it comes to making the payments.

 

2)  Flexibility

 

Flexibility in terms of payment periods and other similar additional clauses should be assessed before choosing the right loan.

 

3)  Financial aspect

 

Consider your personal financial aspect before you get any loan. You should assess how the loan will affect your total debt instead of thinking only in short term basis. Create a budget and stick to it.

 

Secured loans are primarily offered by all banking societies, but it is essential to consider all possibilities before getting into one.