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- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
About Secured Loan
Many individuals require financial aid at some point in life depending on the situation.
There are many loan options available for borrowers in the market. These loans are further bifurcated into two categories, secured loans, and unsecured loans.
In this post, we will understand what are secured loans and what is the difference between a secured loan vs unsecured loan.
What Is A Secured Loan?
It is a type of loan where the lender or the bank will keep an asset as collateral against the money that they lend to the borrower.
In a secured loan the borrower will have to keep an asset as collateral like a real estate property, vehicle, stocks, bonds, etc. against which he or she would get a loan which the borrower has to repay the lender.
If the borrower is unable to pay the loan the lender or the bank in its rights will foreclose or take repossession of the property to recoup the unpaid loan amount.
What Are The Types Of Secured Loans?
There are many types of secured loans available in the market for borrowers. Below are the most common types:
I - Mortgage Loans:
The mortgage is one of the most common types of secured loans that borrowers go for. Not all borrowers have money or savings to purchase a property in cash.
Hence they need to apply for a mortgage through a lender to get the required finance to purchase the home.
In this type of loan, the borrower keeps his home as collateral and the lender will lend money based on the value of the real estate asset.
The borrower needs to qualify for the mortgage based on the mortgage guidelines and parameters.
Once the loan is disbursed to the borrower the borrower needs to repay the loan according to the terms set by the lender.
If the borrower is unable to repay the loan, the lender has all the rights to foreclose the property and sell it to cover the unpaid mortgage balance.
II - Auto Loans:
An Auto loan is also one of the common types of secured loan that many individuals opt for.
The borrower has to keep their vehicle as collateral against which the lender will lend the money to the borrower.
Based on the credit history of the borrower, the lender will qualify the borrower for the loan amount to purchase the vehicle.
The borrower has to repay the loan according to the loan terms. If the borrower is unable to repay the loan, the lender will repossess the vehicle and sell it to cover the unpaid loan balance.
III - Business Loans:
Many businesses may apply for secured business loans. For example, if you or an owner of a manufacturing company and want to buy manufacturing equipment, you can get a secured business loan keeping the equipment as collateral.
The lender or a bank will lend the money to the business based on the asset’s estimated value.
You as a borrower may also have to sign a personal guarantee so that if the business is unable to pay, you as the owner of the business are responsible to pay the unpaid balance of the loan.
If the amount is unpaid by the business and the owner, the lender has the right to seize the property and sell it to recoup the unpaid balance on the loan.
IV - Secured Credit Cards:
This type of credit card is usually taken by individuals who are on a path to building their credit.
The borrower has to pay the security deposit to avail of a secured credit card and get a credit limit based on the deposit amount.
The customer pays the credit card bills in a similar way to any other credit card. If the customer is unable to pay the credit card bills, the bank will recover the money from the security deposit that the customer paid at the time of acquiring the credit card.
What Is The Difference Between Secured Loan Vs Unsecured Loan?
Secured Loan:
A loan is backed by collateral which is an asset belonging to the borrower that the lender can seize if the borrower is unable to pay the loan obligations.
Once the loan is paid in full along with the interest rate charged, the borrower owns the collateral clean and clear.
However, if you are unable to make the monthly payment on the loan the lender or the bank can seize your asset to recover the balance loan amount.
The interest rates charged by the lenders or banks on these types of loans are lower compared to any unsecured loan as the lender has the collateral as a backup.
Mortgage, auto loans, and secured credit cards are a few of the most commonly used secured loans.
Unsecured Loans:
These are loans with no collateral as a backup. These types of loans are usually provided to the borrower based on their credit standings (credit history and credit scores).
Since there is no collateral backup in such a loan, the interest rates charged by the banks or the lenders are usually higher compared to the secured loans as the lender has a higher risk in case you are unable to repay.
Credit cards, personal loans, and student loans are a few of the most commonly used unsecured loans.
If the customer cannot pay the unsecured loans, the lender has the right to sue you, which might also negatively impact your credit, resulting in a denial of future loan requirements.
Conclusion
Secured loans are one of the best ways to secure finance for your needs. However, you need to make sure that you have proper planning if you ever plan to take one.
Buying a home or a car is one of the biggest financial decisions that you will take in your life. Ensuring to have a backup plan ready would be the right way forward if you are planning to get a secured loan.
