What are secured loans?
When you take out a personal loan there are two main options that can be chosen, depending on your requirements and what a lender is prepared to offer you. Secured loans are a way a bank or other lender can protect their investment because these types of loans are secured by an asset that is used as collateral, such as a home or a car. Unlike unsecured loans, where there is no asset placed as collateral protection for the lender, a secured loan gives that lender more comfort in the knowledge that if you default they may be able to sell the asset to get their money back.
Why do people use secured loans?
Secured loans are popular if you want to borrow a large sum of money, such as for purchasing a property or a new car, and in general you may be offered higher borrowing limits, lower interest rates (and, possibly, fees) and a longer term for the debt to be repaid. Understandably, lenders are unlikely to advance a large amount of money without some assurance that it will be repaid. If you put, for example, your house up as collateral the lender reckons you will do everything you can to keep up regular payments until the loan term is ended. Secured loans can also be advanced as home equity loans, based on the current market value of your home less the amount you still owe. Once again, the house is the collateral for the loan
What are the main features of secured loans?
As the name indicates, a secured loan is secured on an asset that you possess. The most common form of a secured loan is when you take out a mortgage. The loan is secured on the property you are buying and the assurance of that kind of protection for the lender means they may offer more advantageous interest rates and let you borrow more than you would otherwise have been able to. Repayment periods for large secured loans can be up to 25 years, and some companies may offer an even longer period. When you are looking at the repayment period for a secured loan remember the longer the time you take to repay the more interest you will be paying.
Secured loans can be negotiated with either fixed or variable interest rates so you can make a measured decision as to which is most appropriate for your circumstances.
What are the pros and cons of secured loans?
Secured loans will generally offer larger amounts to borrow and, because they have collateral – which could also include personal belongings such as valuable jewellery or artworks – you may benefit from a lower interest rate than if your loan was unsecured. Longer repayment times can also be beneficial.
If you fail to pay off the loan, for whatever reason, and you don't adhere to the loan's terms and conditions, the lender is entitled to the asset you have put up as collateral and could sell it to pay off your debt.