All About Secured Loans

Secured loans are basically loans that are guaranteed by collateral. When you have this type of loan, you must allow the lender to take ownership of the collateral should you fail to pay.

Mortgages and auto loans are good examples. A financial institution will repossess your vehicle if you default on your loan and that vehicle was used as collateral. This way they are able to sell the vehicle and recover the money that was lost.

This type of loan poses less risk to the lender since they have the option to sell your property and know they won’t lose a lot of money should you default. Therefore, you will usually get a better interest rate than with an unsecured loan.

Bankers will determine the terms of a loan based on a number of factors. For a mortgage, the term will be longer since real estate tends to appreciate or increase in value over time.

For a car loan, the term will be shorter, usually between three to six years for a new car. This is because vehicles always depreciate or decrease in value over time. Most lenders will not even offer a secured loan for vehicles over a certain age because they cannot resell them and recoup their money. To finance an older car you will either need to get an unsecured loan or use some other collateral.

As with any type of loan, your credit score will play a big part. If your credit is less than perfect, you may not have the option between secured and unsecured loans. You may be required to provide collateral for any loan you apply for.

Check out the section on credit scores to find out how to increase your score and open up lots of new options in your financial life.

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