A secured loan is a loan backed by a piece of collateral, i.e., something tangible like a piece of land or a paid-off vehicle, which the lender uses as assurance that they will get their money back if the borrower is unable to pay. The lender takes the collateral if the borrower is unable to pay the loan as agreed. On the other hand, an unsecured loan is not backed by any collateral. These include student loans, personal loans, and credit cards.
Depending on the amount borrowed, lenders have different requirements for the type and value of collateral accepted. For instance, auto title loans are secured by the borrower’s vehicle title, while secured credit cards are backed by the borrower’s own cash as collateral. Investments or savings can also be used to secure a loan. There are different types of secured loans:
These require a minimum cash deposit of between $49 and $750 to act as collateral. These loans attract varied rates and fees depending on the lender and creditworthiness. Rates range between 12% and 30% APR plus annual fees ranging between $0-50. The borrowing limit is usually equal to the amount deposited.
Home equity loans (HELs) and home equity lines of credit (HELOCs)
These loans are secured by the equity that a borrower has in his home. They have a loan-to-value ratio of 80% or lower. These loans are used for loan repair and improvement, although borrowers can use them for debt consolidation or finance their education.
These are loans used to purchase a car. They attract an interest rate of 5.1% for new cars and 8.72% for used cars. The borrowing limit is varied based on the lender’s requirements and creditworthiness of the borrower.
A cash-strapped borrower takes these loans with the promise to pay back on the next payday plus a fee. In this case, an authorization to access the borrower’s funds in the bank or prepaid account are used as collateral for the loan. These loans are usually short-term and run for between two to four weeks.
These are fast loans and are secured by the borrower’s car title. Although they came with varied terms and requirements, they generally attract huge rates and fees.
A mortgage is used to buy a home. In this case, the purchased home serves as collateral for the loan. As opposed to other secured loans, existing and healthy credit is required to secure a mortgage. Consumers with poor credit may end up paying higher monthly payments and interest rates.