Guide To Secured Loans
May 14, 2012
In the current harsh economic climate, obtaining credit can be difficult as banks are much more cautious than they used to be. If you are looking to borrow money, it’s a good idea to research loans online at MoneySupermarket where you can compare secured and unsecured loans. Here is a look at the pros and cons of secured loans.
Essentially, a secured loan is one which the lender can secure against your property. This may be anything of any real value, although more often than not it is a car or, for larger loans, your home. Once the terms are in place the lender then has the right to take the property on which you secured the loan should you fail to make the repayments. The lender can then sell the property in order to get their money back.
Types of Secured Loan
There are basically five types of secured loans: a Homeowner Loan; a Title Loan; a Secured Car Loan; a Pawn Shop Loan and a Consolidation Loan.
A Homeowner Loan is generally taken out by individuals who are unable to get any other type, usually because of a bad credit score. The amount of equity (the value of the property less the outstanding mortgage) the homeowner has in the property determines how much money can be borrowed. In some cases, lenders will offer a larger loan (up to 125% of equity), although the interest rate will be much higher.
A Title Loan means that the lender will hold a ‘lien’ against your property, whether it is a car or house. In other words, they will remain the legal owner of the property until the loan has been repaid. Should repayments not be met, the lender can repossess the property for resale.
A secured Car Loan applies to transactions in which an individual receives a loan in order to purchase a car. The person in this case will not be able to sell the car until the loan is paid off.
A Pawn Shop Loan allows someone to secure a loan on any asset of sufficient value, such as jewellery or a TV. The value of the item, however, will be set much lower than its real value and this will be the amount of money you can receive. Once the loan is repaid, provided this is within the agreed period, the property will be returned.
Finally, a Consolidation Loan enables an individual with a number of debts to put them together into one single loan. The main advantage of this is that the interest rate of the new loan will, more often than not, be lower than that of the other debts.
Advantages of a Secured Loan
The main advantage of a secured loan is that people will be able to borrow considerably more money than they could with an unsecured loan. In addition, the payback period for a secured loan is generally much longer than for an unsecured one. A secured loan is also easier to obtain, even with a bad credit history.
However, the interest rate on a secured loan is likely to be variable, meaning it can go much higher. In addition, while many believe a secured loan is safer, there is actually a greater risk involved as there is always the possibility that you will end up losing your home. Many, therefore, conclude that taking out a secured loan should only be done when there is no other alternative.
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