There are options for individuals who would not normally qualify for the long, drawn out process of the traditional bank or credit union loan. Secured loans are an alternative to the traditional bank loan. This article will give you a better idea of how secured loans work and which types of secured loans will be best for your situation.
What are secured loans?
Secured loans are loans that are backed by an asset (item of value). The item used to back the loan is called collateral. A secured loan is also known as a collateral loan.
Sometimes the item that is purchased, such as the home or a car will be used as the collateral for the money you need to borrow to pay off that item. You pay off the loan while you enjoy the use of the item you bought. But if you fail to pay the loan off, you lose that house or car.
Another way how secured loans work will be by borrowing cash in exchange for leaving something you already paid off and own as the collateral. By using your personal assets as collateral like your home, a boat or car to get a secured loan, you are practically guaranteed approval and cash quickly. You will also get a lower interest rates and more flexible borrowing and pay back options because you are less risky to the lender.
As the term secured loans implies, a secured loan means you are offering the lender “security" that you will repay the money you borrowed according to the agreed loan terms and conditions.
A lender only lends a person money when they have faith that the person will repay the loan. When you secure the loan by putting up some items of value on the line, the lender will feel more confident that you will do everything in your power to repay the loan.
Types of secured loans and how secured loans work
There are several types of secured loans available. Here are the most common types of secured loans:
Mortgages and how secured loans work when you borrow to buy a house
A mortgage is a secured loan that uses the house as the collateral to secure the large loan. If you don’t pay the mortgage, you’ll lose the house and the lender will foreclose the property to sell it at auction. Homes are big, expensive purchases, therefore mortgages repayment schedules are normally 30 years long.
The two most common types of mortgage loans are fixed-rate and adjustable-rate mortgages. Fixed-rate mortgages are set with an interest rate that remains the same over the life of the loan. Adjustable-rate mortgages start out with low interest rates that increase over time, usually after three to five years.
In most cases, borrowers must pay a down payment up front of 10 to 20 percent of the home's selling price to get a mortgage. A borrower who uses a government loan program may only have to pay a 3 to 10 percent down payment instead.
Car loans and how they work
A car or other type of vehicle loan uses the car you will be buying as collateral. The lender will pay the dealership for your car and set you up to pay off the car in monthly installments. Car loan repayment schedules normally run for 3 years to 7 years, on average.
The lender charges you interest on the borrowed amount based on your credit history. People with poor or no credit can still qualify for car loans, but the interest rate is often higher than for a borrower with good credit because a lender will see lower credit score individuals as higher risk.
Title loans as a secured loans option for fast cash
Title loans are short-term cash loans that use a borrower’s paid off vehicle as collateral for the loan. A lender will hang on to the vehicle’s title as collateral to back their loan until it is repaid. The title must be free and clear with no liens and in the borrower’s name. The vehicle must work well and be in good condition to qualify for a title loan. Car title loans lenders evaluate the vehicle and use standard industry vehicle pricing guides like Kelley Blue Book, to determine the car's value.
The amount of the loan is usually no higher than half of the value of the vehicle to guarantee that the title loan lender can recover the loan costs if the borrower does not pay the loan back. We can provide you with a rough title loan estimate here on our website. Title loans don’t require a credit check, but the borrower must have steady monthly income to show that they can successfully repay the loan.
Pawnshop loans are secured loans, too
Pawnbrokers lend people money short-term in exchange for holding on to the property the borrower offers as collateral. The most popular pawn items borrowers use as collateral for pawn loans include jewelry, watches, electronics, tools, musical instruments and firearms.
The amount of the loan depends on the value of the item that is used as collateral. The more demand for the item, the more money the pawn broker is willing to lend. The pawnbroker will give the borrower a time frame to repay the loan by, plus interest. If the borrower does not repay in time, the pawnbroker will keep the collateral and sell it at the pawn shop.
Secured loans are a good option when a borrower has limited loan options. As long as they understand that they put the collateral at risk if they don’t repay the loan, secured loans are useful when cash is needed fast.