November 1, 2024

What You Need to Know About Secured Loans

Taking out any kind of loan is always a major financial decision and one that should not be made lightly. It is vital that you are aware of the financial product you are using and what it means. Secured loans are one of the most common types, so this post will take a closer look at secured loans outlining everything you need to know.

 

What is a Secured Loan?

A secured loan (often called a homeowner loan) is a loan that allows you to borrow money by putting up an asset as security (or collateral). This is usually your home but could also be another valuable asset, such as a car or jewellery. With a secured loan, if you are unable to keep up with repayments, the borrower can sell your asset as a way to get their money back. This differs from an unsecured loan, where the borrower does not have to put up any kind of collateral.

 

Types of Secured Loans

You should also know that there are a few different types of secured loans available. A few of the main types include:

  • Home equity or homeowner loans: Borrowing money against your home from your current mortgage lender.
  • First and second mortgages: A first mortgage loan can be used for a first-time buyer, while a second mortgage is similar to a home equity loan but with an agreement with a different lender.
  • Debt consolidation loan: Combining multiple debts into one new loan so that you only have to worry about making one payment each month.
  • Logbook loan: A loan that is secured against your car (you can still use the vehicle).
  • Pawnbroker loan: Loans against jewellery, artwork, antiques, and other assets.

 

Pros & Cons

As with any type of loan, there are both pros and cons to weigh up.

The main benefits include:

  • You can often borrow more money than with an unsecured loan, as there is less risk for the lender
  • It is easier and faster to get approved for a secure loan as there is less risk for the lender

The main drawbacks of secured loans include:

  • You could lose your house or other collateral if you can’t keep up with repayments
  • Repayment periods are often longer than unsecured loans
  • Longer repayment periods also mean you end up paying more in interest
  • Variable interest rates can increase repayment costs—this is why you must always check whether the rate is fixed or variable.

 

Hopefully, this post will be educational and help you gain a stronger understanding of secured loans. Secured loans can be an excellent financial product in certain circumstances, but you must always understand what is involved, particularly when you are putting your house or another valuable asset up as collateral, and seek professional advice if needed.