Secured loans are loans that always require some object of value to back up the loan. Basically, when a loan is secured you offer some property as a guarantee of payment. If you default on a secured loan then the lender can take your property or foreclose on your home. Secured loans are often easier to obtain than unsecured loans because the lender is not taking such a risk with their money.
The security that you offer against a secured loan may be your car but it is more usually real estate, whether your home is mortgaged or you own it outright. If you have a car loan and you default on the loan repayments then the company can come and repossess your car in the same way that they can foreclose on your home if you default on mortgage payments. When you take out a secured loan you take a risk.
Disadvantages of Secured Loans
As with all loans, secured loans carry advantages and disadvantages. There is a chance that you could lose your home with a secured loan or you could find that your home falls into negative equity if house prices go down after you have taken out your loan.
A secured loan such as a mortgage could mean that you will be repaying the money that you owe for a long period of time. As we cannot see ten or fifteen years into the future there is no way of knowing whether you will be able to continue making the payments or whether you will default and have the lender foreclose on your home.
Don’t consolidate credit card debt with a secured loan. If you have difficulty making credit card payments the lender will have a harder time getting their money back but you will not lose your home. When you consolidate debts with a secured loan you could face foreclosure.
Advantages of Secured Loans
Secured loans often have a much lower rate of interest than an unsecured loan because the lender is not taking such a risk in lending you the money. Secured loans can be easier to obtain than an unsecured loan because you have collateral, which means that if you default on the payments the lender will not lose out entirely.
Secured loans are cheaper to pay back because there is less interest, sometimes you get extended time to pay and some lenders allow a mortgage holiday where you can skip a repayment once in a while – although it has to be paid back eventually.
It is much easier to borrow larger sums of money through a secured loan because the lender faces a lot less risk. When you have a longer repayment period it means that you can pay lower monthly repayments on your loan. The amount that you can borrow with secured loans is greater because you have valuable collateral.