Secured Loans
A secured loan is a loan where you will be required to use
your property as security (generally called as collateral) against the loan, so
the lender is able to balance the risk of lending to you.
A secured loan can be used for various purposes like consolidating debts, home improvement, purchasing a car and a vehicle, going for a vacation, business purposes, and medical expenses.
Availing a secured loan is an easy task. You can apply it on line.
What Can Be Used as Collateral?
The following items can be used as collateral to obtain a loan:
- A home
- A car
- A savings account
- Investments, like a 401K or other individual retirement account (IRA)
If you are applying for a loan to buy a car or home, you can use the car or home you are purchasing as collateral. Items you are purchasing on credit and do not own yet can be considered collateral. Actually, anything of value can be used as collateral as long as you own it and can prove you own it.
What Can Not Be Used as Collateral?
The following items cannot be used as collateral:
- Furniture
- Clothing
- Family china
- Store credit cards
Household goods that you already own cannot be used as collateral.
Secured loans use three basic instruments to create the
loan. They are
- Ownership
Document
- Credit
Agreement
- Security
Document
The amount that can be borrowed varies
from lender to lender and your individual condition. The amount that can be
borrowed, the term available and the Annual Percentage Rate (APR) will depend
on:
- Value
of your property
- Your
personal condition
- Your
ability to repay the loan
If you have a secured loan, it means you have guaranteed
your lender will be repaid one way or another by giving them a claim on
something you own.
The lender can seize the collateral to recoup their
investment if the loan goes unpaid. This guarantee gives lenders a great deal
of security and allows them to charge low interest rates.
Unsecured Loans
Unsecured loans are the loans which do not require the
borrower to put up any security against it. Therefore, creditor will suffer if
the borrower doesn't pay off an unsecured loan on time. They are a risk-free
loan from the point of view of the borrower.
In general, unsecured loans have higher interest rates than
secured loans. Sometimes, lending institutions ask for an extra person who can
co-sign for the unsecured loans, or vow to repay the loan if the borrower fails
to do so.
Unsecured loan is not for everyone as the lending company is
taking a high risk in granting unsecured loans. Actually, these loans are
granted only to those borrowers who possess a good credit score.
The good credit score is required as substitute for the
collateral. A person with a good credit score is assumed to have the capacity
to payback the loaned amount. This implies that anyone who plans to obtain an
unsecured should obtain a copy of their credit report.
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