All loans advanced by financial institutions are categorized broadly as secured loans and unsecured loans. A secured loan is money borrowed by an individual or a business by submitting collateral which could be property, vehicles, jewelry, fixed deposits or any such asset of great value, belonging to the borrower. These assets are a security and guarantee that has been taken by the lender in lieu of the loan and the assets secure the loan. However, the loan disbursed against the collateral is based on a percentage of the total value of the assets. The borrower may receive a 100% loan on the total value of the assets, provided the borrower has an outstanding credit history. But this almost never happens as financial institutions will always leave a sizable margin to recover the money advanced as well as any charges and other expenses that may arise in case the borrower does not comply with repayment terms.
Types of secured loans
Mortgage loans are a classic example of secured loans. Property purchased using a loan is mortgaged to the lending institution. The borrower can use his property or rent it out and use the money to pay back the loan, for this reason considering it as another source of quick cash for many borrowers’ sounds great. Mortgage loans attract interest and monthly repayments and are scheduled to amortize over a fixed period as decided by the borrower. Some people would go for a debt consolidation loan to pay off all their loans using property as collateral, but this is one bad move as these loans attract a much higher interest and the debts which you had earlier are very much there, all neatly packaged into one explosive bundle. However, a home equity debt consolidation loan would attract a lower interest rate and may work well.
An auto loan works pretty much on the same lines as mortgage loans, where the loan is secured by the vehicle purchased. A personal secured loan is finance generated for any immediate expense or funding a dream holiday, repairs to your home or for investing where the collateral could be jewelry, stocks, shares or any other valuables. A certificate secured loan is also a type of personal loan where you can borrow against your savings account certificate. Here the borrowing can be up to 100%.
Interest rates on secured loans
As the money advanced to the borrower is much lower than the value of the asset, most lenders will offer lower interest rates and smaller equated monthly installments (EMI). This should prove a boon for the borrower because he is able to secure a loan and will be comfortable paying off the loan to free the asset. As secured loans are granted against assets the lender is not unduly worried about recovering the money in case of non-payment. The asset can be seized and sold off to recover the money that was advanced.
Advantages of secured loans
Secured loans are a great way for building credit or for erasing a bad credit history. All the same customers should avoid defaulting on payments as this attracts heavy penalties and may push you deeper into a debt trap. Because you have a secured loan does not mean you can be complacent, on the contrary you should be extra careful and wise as this is a good way to set you on your way to financial stability. If you successfully pay off your secured loan, you save your asset as well as complete the task for which you took the secured loan. This is a win-win situation for you, as you will be looked upon as a valuable and reliable customer and any future loan requirements will be met without any hassles.