Emergencies can pop up at any moment. If you’re not prepared, you’re left scrambling for ways to cover the unexpected costs. That’s when many people look to borrow money from a bank or other financial institution.
There are many different types of loans available, with most falling into two different categories – unsecured or secured. While both types of loans have a lot of similarities, they are also very different.
What Is A Secured Loan?
When you use a secured loan, you are guaranteeing the loan with some type of personal asset. This is also known as a lien or collateral. This lien will stay in place until the entire loan has been paid in full. If you miss a payment, you risk losing the asset you’ve used as collateral.
You might be wondering if the collateral would be forfeited after a single missed payment. Typically, that’s not the case but you should always look at the fine print for any financial transaction. Lenders will lay out the terms with the loan documents you receive.
What Assets Can Be Used As Collateral?
Secured loans require borrowers to use an asset as collateral. Some lenders are going to have specific requirements for what this asset needs to be. However, some of the most common forms of collateral include:
- Cars : You would need to hold the title.
- Bank Accounts : Savings accounts, checking accounts, money market accounts, certificate of deposit accounts.
- Investments : Stocks, mutual fund, ETFs.
- Insurance Policies : This would include life insurance policies.
- Real Estate : Equity that has built up in either your primary residence or investment property.
Secured Vs. Unsecured Loans
While secured loans are backed by the collateral a borrower offers to the lender, unsecured loans are not collateralized. Borrowers get approved for unsecured loans solely based on their income and credit history – while they won’t have collateral property seized by the lender if they default on the loan, though, lenders can still take them to court to pursue repayment.
When you take out a secured loan, you’re offering up collateral as backing. This tends to make the lending decision easier and it’s a more popular product for anyone with less than ideal credit. However, with an unsecured loan – like a student loan or a personal loan – the lending decision is made primarily based on your credit score and income. In some situations, you’ll find that secured loans are harder to get but also come with a lower interest rate. Before you apply for either a secured or unsecured loan, it’s best to understand which will be best for your situation.
Types Of Secured Loans
There are a few different types of secured loans. Some are used for the purpose of building https://paydayloanstennessee.com/cities/gadsden/ up credit or working to fix credit that has been damaged. Other secured loans are used to purchase large assets that wouldn’t be available if it wasn’t for the collateral you offer with the loan. Here are three different types of secured loans.
Secured Credit Cards
Secured credit cards are credit cards frequently used by anyone with less than ideal credit or no credit history at all. When you take out a secured credit card, you’re required to put down a small cash deposit, typically anywhere from $200 – $500; however, it can be higher in some situations. If you’re unable to pay your card balance, the issuer will have the right to take the deposit to cover the debt. Some secured credit cards will return the deposit to cardholders after a certain amount of on-time payments, allowing them to graduate into an unsecured credit card.