Log InJoin 

What Is A Secured Personal Loan?

What Is A Secured Personal Loan?

When looking to quickly borrow a large sum of money, most consumers will be applying for a secured personal loan. Financial institutions are more likely to issue a secured personal loan because they are protected should the borrower fail to repay the loan. There are also unsecured personal loans, but they have many more drawbacks and are often issued for much smaller amounts at higher interest rates. There are a number of different considerations we seeking a secured personal loan which are important to understand to protect yourself.

What makes a personal loan secured is that the amount borrowed from a lender is backed by underlining tangible asset. The asset is important because it is a lenders safety net should the loan go unpaid. For example, most banks and credit unions are unlikely to issue a personal loan for $50,000 based solely on an individuals credit history. If that same consumer has an asset worth $50,000 then the lender knows they will get at least that much if the loan falls into default. This may sound like it's only to the lenders advantage since they are able to protect themselves but that's not really the case. Without collateral, consumers would be unable to borrow large sums of money for personal use since most financial institutions would be unwilling to assume the risk of default. Consumers also get better interest rates and other loan terms when using collateral since they are lower risk loans as opposed to unsecured personal loans.

One of the most popular types of secured loans is a home equity line of credit or home equity loan. Many homeowners will often use a HELOC to consolidate debt, remodel a kitchen or bathroom or start a small business. Each of these personal uses often entails tens of thousands of dollars and without home equity it is highly unlikely they would get more than a few thousand from a lender. If the home equity line of credit is issued by the same institution which holds the mortgage, it can also help in obtaining the loan due to the established relationship and payment history.

Other types of secure personal loans are title loans and pawnbroker loans. Title loans use a vehicle title as collateral when issuing a personal loan while pawnbroker loans use personal assets such as expensive jewelry or electronics as collateral for the loan. Sometimes payday loans are considered secured personal loans since the loan amount is supposedly backed by a worker's paycheck and checking account. However, if these documents were forged or created using identity theft then the lender would have no recourse since they didn't physically have access to an underlying asset.

One important factor to keep in mind about secured personal loans is the risk of losing the asset used as collateral. Any time a secured loan is issued to a consumer, the loan agreement stipulates the underlying asset can be seized to settle the outstanding loan balance. Defaulting on a home equity line of credit risks having your home foreclosed upon and using a title loan risks having your vehicle repossessed. Even pawnbroker loans are risky if you use sentimental assets like generations old jewelry and are unable to repay the loan in the allotted time. Keep this risk in mind when seeking a secured personal loan since it isn't just your credit history that will suffer if you default.

Image by: Nomadic Lass