A Simple Guide To Secured Loans
If you need money for any purpose, you may be considering a loan, and you will need to know the difference between an unsecured and secured loan. An unsecured loan is offered based on your credit score and circumstances, whereas an asset backs a secured loan with its financial value, making it easier to attain.
The financial asset could be a car or home, and the lender may use it to recoup the outstanding loan value if you fail to pay. This security gives lenders confidence to lend to you and motivates you to make your payments on time.
The benefits & drawbacks of secured loans
There are benefits and drawbacks to taking out a secured loan. Secured loans usually have a lower interest rate, and you can borrow a more considerable amount. However, your collateral is at risk, and approval usually takes longer compared to unsecured quick loans.
There are also different types of secured loans:
- Vehicle loans – This type of loan is secured against a car, truck, boat, motorcycle, or lorry.
- Bridging loans – These are short term loans lasting between 1 and 18 months. You can take out a bridging loan and use the money for any purpose. Interest is rolled into the loan, which means there are no payments until the loan’s end when the value and interest become due. At this point, you can either pay back the loan or refinance it.
- Property development loans – These are similar to bridging loans, but they are for property developers. Developers use the funds to buy land, pay for renovation and building work, or free up working capital.
If a secured loan defaults, the lender may repossess your car, or you might lose your home or any other collateral you leveraged to attain the loan. The lender can put a lien on your asset, which is essentially a lender’s claim to the security. The loan company can take ownership and sell the property or vehicle to recover their losses. You may still end up owing money if the sale of the asset doesn’t cover the outstanding loan amount and interest.
Top 3 FAQs
- Are secured loans easier to get than unsecured loans? Yes, the security shows that you have the means to pay back the loan, even if you were to lose your income.
- Do secured loans affect your credit? If you default on the loan, you may end up with bad credit, and the default will remain on your credit report for up to seven years. If you get into financial trouble, make your lender your first call, who may be able to help by restructuring your payments.
- How can I get out of a secured loan? You can repay the loan or refinance the loan.