Secured loans are the loans protected by an asset or collateral of some sort. The purchased item, such as a home or a car, can be used as collateral, and a contract / hold can be placed on such purchases. The finance company or bank will hold the deed or title until the loan has been paid off, including interest and all applicable fees. Other items such as stocks, bonds, or personal property can be put as a security for a loan as well.
Secured loans are usually the best way to obtain large amounts of money quickly. A lender is not likely to loan a large amount without more than your word that the money will be repaid. Putting your home or other property on the line is a reasonably secure guarantee that you will do everything in your power to repay the loan.
If the debtor is unable to maintain the said monthly payments each month to the creditor he is considered a defaulter and hence the lender can take possession of the asset used as a security and may sell it to recover some or the entire amount lent to the borrower.
On the other hand, it is relatively easy to obtain a secured loan incase you have a asset that can work as a security or collateral, because for the creditor a secured loan means lesser risk. It is for this reason that the interest rate incurred in a secured loan is fairly less than an unsecured loan.
Types
a) A Home Loan is the most popular type of secured loan used by consumers. A home loan allows you to borrow a said amount to buy or build a property. The interest incurred in a home loan is lesser compared to other debts / loans as the property itself work as a collateral / security.
b) If you already have a Home Loan or property and need monies for several reasons i.e. Home Improvements. You can go for a secured loan. Such loans are based on the amount of home equity, or the value of your home minus the amount still owed. Your home is used as collateral / security and failure to make timely payments can result in losing your home.
c) Other types of secured loans include debt consolidation loans where a home or personal property is used as collateral. Instead of having many payments (usually high interest) to make each month, money is loaned to pay off the original debts, and the borrower then only has to repay the one loan. This is not just more convenient but it will also save a lot of money over time, since rate of interest for secured loans are lower. A debt consolidation loan usually presents a lower monthly payment as well.
d) A Vehicle Loan can also be considered as a secured loan as the vehicle serves as a security towards the loan. However, the interest in a vehicle loan is much higher than on a mortgage because unlike house property, the value of the vehicle depreciates with the time. Such loans are not lent for a long term and the down payment expected is quite high.
e) Higher Purchase also works in the same fashion like the secured loan. Any goods purchased serves as a security while you are obliged to pay an agreed monthly payment each month.
