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.
Different Secured Loans
There are several different types of secured loans. The four most common secured loans include:
Mortgages
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
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
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
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.