Secured loans can be tricky to understand, and sometimes even frustrating to figure out. It seems as if every loan agent or creditor has a different definition and a different meaning of what a secured loan entails. Even after hours of searching on the internet, some may get very confused as to what everything is and how to trust what they’re being told. So, what is a secured loan? What is an unsecured loan? What is the purpose of a secured loan?
First of all, a secured loan is a type of loan where the borrower offers an item they own as collateral (or an asset) for the loan. Think of it this way. You really, really want to get that brand new laptop, but you haven’t got the money for it. You go to a local lending agent and ask for a loan of $1,000 to help pay for your new laptop. The lending agent needs to make sure that he or she will eventually get back the money that they are giving you. In return for giving you the money they ask for some form of collateral: an item or piece of property roughly equal to the value of the loan they are giving you. So, for a $1,000 loan you decide to use your car as collateral. So, you use that car, and you technically still own it, but you’ve now given up some of your rights on that property to the lending agent. If you can’t pay back your loan that lending agent can now use their limit rights of your property to repossess it and sell it to hopefully make back the money that you had left to pay. If the lending agent does not make back all of their money, then you may find that a deficiency judgment is placed against you.
A secured loan contrasts an unsecured loan. An unsecured loan is when a loan is taken out without any collateral attached to it. Typically, this means that you will have higher interest rates to help the lending agent make back some of its money in case you don’t pay back all the loan money. These can be loans such as student loans or car loans.
The purpose of having a secured loan is mainly a safety net for the lending agent. This way, the lending agent isn’t constantly going into debt by giving out money without ever earning it back. Also, it can be a sense of motivation for a borrower to actually pay their loan back. Nobody likes having their property taken away, so having some form of collateral to motivate a borrower to pay back their loan is another purpose of taking out a secured loan. Finally, a secured loan can also serve the purpose of extending the credit of the loan or possibly lowering the interest rates as well. Secured loans are also the most common type of loan to acquire.
Taking out a secured loan is sometimes much better than taking out an unsecured loan, especially if you want a lower interest rate and need the money quickly. Collateral is what makes a secured loan different, though, so make sure that you have something worth relatively the same amount of the loan you are going to take out. A secured loan might be the best option for you, but make sure that you know all of your options before borrowing first.