A secured loan is a type of loan that is secured by collateral such as a house, car or any other possession with value. If the borrower is unable to fulfill his/her financial obligation (e.g. misses a monthly payment or defaults on the loan), the lender has the right to collect the collateral.
Since the loan is secured, the interest rate is generally lower. This is because there is less risk for the lender should the borrower default on the payment.
This type of loan is a good option if you need funds for an important purpose. This can also be an effective way to build good credit history as long as you choose a reputable lender, and that you do not default on payment.
But of course, it’s necessary to do ample research about it before you apply for one so you know what you’re getting into.
What are the Types of Secured Loans?
- Mortgage – A mortgage is one of the most common types of secured loans. The borrower’s home serves as the collateral. This means that your risk losing your home if you miss or default on loan payment.
- Car loan – With this type of loan, a car is used as the collateral.
- Secured credit card loan – In this type of loan, the lender will require the borrower to make a deposit against the card’s upper limit. This is used as guarantee for the loan. This is typically offered to clients who want to build credit history or boost low credit rating.
- Title loan – When you take on a title loan, you use a paid-off property as collateral. This usually has higher interest rates.
What are the Benefits of Secured Loans?
Secured loans have several benefits that appeal to many borrowers. Here are the major ones that you should know about:
- Lower interest rates – This is the best thing people love about secured loans. A secured loan is less expensive than an unsecured loan because it has lower interest rates.
- Effective way to build credit rating – As long as you do not miss on any payments and you pay your monthly due on time, a secured loan is a good way to build your credit history (or even improve your current rating if you have low credit score).
- Easier to apply for – Borrowers usually have higher chances of being approved for secured loans than unsecured loans as these are secured by collateral, which many lenders prefer because this means lower risk for them.
What are the Dangers of Secured Loans?
The biggest danger of the secured loan is that you are at risk of losing the property that you used as collateral if you are unable to make the repayments.
Losing your car, for example, can already cause major inconvenience for you. But losing your house is even worse, as this will severely affect your daily living.
Not only that, if you miss any payment, this will also have a negative impact on your credit history.
How to Apply for Secured Loans
Lenders have different requirements for secured loan applications. Generally, you will need to prepare the following:
- Valid identification documents
- Accomplished application form
- Property documents (e.g. title/s of property)
- Income statements
- Account statements
You will need to submit complete requirements for the lender to start processing your application.
How to Increase Chances of Approval
Aside from submitting a complete set of requirements, you will also need to do the following to improve your chances of getting approved:
- Improve your credit rating
- Lower your debt-to-income ratio
- Organize your finances
The credit rating is the first thing that lenders look at when they receive loan applications. You need to double check your credit report so you can address any erroneous entries. You should also take the time to improve your credit score by making payments on time.
Another thing that lenders look at is the debt-to-income ratio. It’s best that you try to resolve first other debts that you have, or look for more sources of income.
Moreover, you need to organize your finances in order to determine how much of a monthly payment you can comfortably afford.
A secured loan can be the answer to your financial needs. However, you must first understand the benefits and risks, and the whole process of application to make sure that you do not encounter any problem in the future.