Taking out a loan can be an intimidating process, and to make the right choice you need to research your options. It’s easier when you break it down to the two main types of loans: secured and unsecured.
Secured loans are ones that require collateral, while unsecured loans do not. In order to get a secured loan, a customer will be required to offer up something valuable. This is referred to as “collateral.” A home or a vehicle are the most common types of collateral.
The idea behind a secured loan is simple; lenders want to make sure that their money is safe, and if a borrower defaults on a loan they can repossess the collateral and cover their loss.
There are several different types of secured loans. The four most common secured loans include:
Mortgages are one of the most common types of secured loans, and they’re used to purchase a home. The collateral used for a mortgage is the borrower’s house itself. If the borrower can’t make their payments, they risk losing their home.
Auto loans are secured by the value of a motor vehicle, and borrowers take out auto loans to buy a car, SUV, motorcycle, boat, or any other motor vehicle. They work the same way as a mortgage, in that the lender can repossess the vehicle if the borrower stops making payments.
Title loans are short-term, secured loans backed by the value of a motor vehicle. Unlike auto loans that are taken out to buy a car, title loans are secured with an automobile that a borrower already owns. This means that in order to take out a title loan, the borrower must offer up their vehicle as collateral. If the borrower is unable to repay the loan, the lender can take away their vehicle to recoup their loss.
Secured credit cards are a great way to build up your credit score if you have no credit history. Unlike other secured loans that use a car or home as collateral, secured credit cards use a cash deposit.
If the borrower defaults on his/her payment, the bank uses the deposit to make payment and cover any fees. By paying everything on time, credit card users build their reputation and credit history and can become eligible for other types of borrowing.
There are many different assets that can be used as collateral for a loan. Lenders prefer assets that can be sold for cash, with a value higher than the borrowed amount.
Collateral comes in several forms:
Pawn shops also offer secured loans, where you can use anything of value as collateral. In return, you get an amount of money at a percentage of your item’s value. If you don’t repay the borrowed amount after an agreed-upon time period, they can sell the item you gave them to cover the loss.
As with any loan, secured loans have pros and cons. Since they’re secured with collateral they’re usually easier to get, and the borrower may not need an excellent credit score to be approved. They also tend to be for higher amounts, and they allow people to purchase items or property that they otherwise couldn’t.
One of the downsides can be a lengthy application process. Because there is an expensive asset involved, paperwork may take longer than with unsecured loans. The biggest risk for the borrower with secured loans is losing his or her asset. We always advise our customers to do thorough research and make a plan before taking out any loan.
At CreditNinja, we know that the world of lending can be intimidating. That’s why we make our application as quick and easy as possible. Apply today and your funds will be deposited into your account as soon as the next business day.¹
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