Secured Personal Loan

Before lenders can advance a loan, they want to be sure that they will get back their money. A debt secured through word of mouth is called an unsecured loan. When you borrow an unsecured loan, chances are you will be charged a higher interest rate or be denied the loan. On the other hand, you may be required to provide an asset known as collateral to guarantee the loan repayment. Such a loan is known as a secured loan. Collateral is essential in the case of secured personal loans with bad credit.

Assets Used as Collateral

secured personal loan
Property such as a house ca be used as collateral.

When the borrower is unable to repay the loan, the lender can seize an asset used as collateral to offset the debt owed. In such a case, it is easy to get a secured loan with a bad credit score. Some of the assets that you can use as collateral include:

  • Property such as a house, land or car
  • Certificate of deposit
  • Money in a savings account

The lender has to appraise the collateral to determine its value. The borrower has restrictions on any property used as collateral. For instance, you cannot sell a car that is used as collateral. However, you have physical control over the property.

How Secured Personal Loan Works

A personal loan can be used in different ways, such as debt consolidation. When applying for a secured personal loan, you will be required to pledge collateral to guarantee the loan. Pledging an asset gives the lender the right to claim the asset if you cannot repay the loan. The right to take possession of a borrower’s property until when there is full repayment of the loan is called a lien. The lien is in effect until when you repay the loan in full amount.

With that in mind, maybe you are wondering, when can a lender take away the asset. This depends on various factors, such as state laws and the loan contract you signed. However, in some states, the lender has the right to take the asset in the event of late payment. Therefore, the asset is at risk in the case of unpaid secured personal loans.

Do Secured Personal Loans affect Credit Score?

Both secured personal and unsecured personal loans have the same effect on credit score. However, what is important is how you manage the loan. If you can manage the loan well and repay it in a good time, then you improve on your credit. If you default on loan repayment or miss payments or make partial payments, the opposite is true; you get poor credit rating.

To be on the safe side, if there comes a time and you are not able to make your minimum payments, make sure to contact your lender. You can work out an alternative payment schedule.

Advantages of Secured Personal Loans

In most cases, secured personal loans are suited for people who do not qualify for unsecured loans due to poor credit rating or any other reason. Secured personal loans have the following advantages.

  • Easy approval. Since the borrower is required to provide collateral, there is no much risk involved and so the lender can approve the loan quickly.
  • Bigger loans. The maximum loan you can get depends on the value of the collateral you can provide. Therefore, if you provide for collateral with a higher value, then you qualify for a higher loan.
  • Credit building. When you use the loan responsibly, repay it in good time, you improve your credit rating.
  • It does not require a credit score. Since the borrower must provide collateral to guarantee the loan, the credit score is not necessary.
  • Low-interest rates. Since secured loans have collateral, the interest rates are usually low since the risk associated with the loan is lower.

Disadvantages of Personal Loans

  • Risk of losing the property. The lender has a lien over the property you provided as collateral in case you default in repayment, or you are behind the payment schedule.
  • Huge debts. In most cases, if the borrower can provide collateral of a higher value, he or she qualifies for a higher loan. In such a scenario, someone might be tempted to borrow more. This may put one at risk financially.

Where to Get Secured Personal Loans

Secured personal loans are available in banks, credit unions and online lenders. Before applying for a loan, make sure to compare the interest rates, minimum monthly payment, repayment period, repayment terms and collateral.

It is not advisable to borrow a loan just before you qualify for one. First, consider borrowing from friends and relatives before you can consider getting one from a financial institution.

Is Secured Loan Personal Appropriate for You?

In many cases, secured loans are alternatives for people who do not qualify for unsecured loans. For this reason, it is then appropriate to consider a secured personal loan. However, make sure that the terms of the loan, interest rates and repayment plans will not hurt you financially.

Vincent is a writer with an interest in finance, business, technology and health niche. He holds a Bachelors degree in Applied Statistics with computing. He is the founder of Nexin Startups; a business web portal. Read more about Vincent and see our complete editorial team at FiFi.