Today’s world is ruled by debt. Not only are our personal accounts and budgets calculated around them, but also the fabric of daily life. Governments often issue debt to get out of tight spots, and whole international associations exist around creating and helping nations steer their way out of debt.
As such, it’s no surprise that many individuals often need to acquire debts as a logical decision. Although debt was once seen as a sign of immaturity, most people need it to be able to pay for necessary things or services as soon as the need arises.
Personal secured loans are a form of debt that an individual or company can use to finance an entity or endeavor. In order to ensure the debt will be paid, an asset is placed as collateral. The loan provider can then, if the debtor defaults, take over the collateral and sell it to recoup the money owed. Mortgages are the most visible examples of these loans.
Types of Secured Loans
In the previous section, mortgages were identified as the most common type of Personal Secured Loans, although they aren’t the only one. In fact, another common type of personal secured loans that’s easy to bypass is the pawn shop.
In pawn shops, people bring an item of certain value, putting it up as collateral in exchange for money. If the loan recipient defaults within a timeframe, usually a short one, the owner of the pawn shop get the right to keep or sell the valuable left as collateral. In most cases, the actual market value of the collateral is almost always higher than the loan tied to it, thus ensuring a profit if the debt goes unpaid.
Personal secured loans can also be done against other assets. It’s not uncommon for people to put their cars as collateral for loans, or even their savings accounts. Home Equity Lines, or second mortgages, do work in the same manner. Collateral-based loans are, in fact, the most common type of high-value loans.
Can I Get a Lot of Cash from These Loans?
How much you can get from a secured loan depends on how much you’re willing to put as collateral. And how much you can put as collateral is directly tied to how much you own in non-liquid assets. Most banks and financial institutions will only lend you lesser money than the total value of your collateral. Even then, it’s always up to the institution to decide whether they’ll accept your assets as collateral or not, and how much they can offer you. You can haggle, but in the end, it’s up to you to take a deal or leave it.
Besides the value of your collateral, which will always be the main factor, other things might sway a lender’s decision on how much they’re willing to part with. Your credit score, for example, works as a trust rating, letting the prospective lender know whether they can trust you or not. Also, other financial details, like your job history and monthly income can help you get a bigger loan… or bring it down.
Most lenders will never strike a deal with a debtor who isn’t likely to pay unless the collateral is so valuable to be turned down. But then, if you default on such a big-ticket item, you’ll be on the losing end.
Why Would I Choose These Loans?
There are plenty of reasons why people go for personal secured loans as opposed to regular ones, where you owe money but put nothing on the line. The main reason people choose them is simply that it allows them to get more money.
When a bank or other such institution has to take a gamble on whether you’ll pay or not, they’ll often offer the smallest amount possible. However, when there’s collateral, institutions feel free to raise the amount, as there is an asset backing up the loan. Having more money available can make a huge difference for many, particularly when paying for medical bills or if they happen to lose their jobs and need money to stay afloat in the interim.
Personal secured loans also often come with lower interest charges. Once again, since there’s collateral with a reasonable value, institutions feel free to give debtors better deals when it comes to the interest to be paid.
Another reason to choose a secured loan is having a poor credit score. People with low credit scores can struggle to get loans, as they’re rated higher on the risk plane. With collateral, institutions will be more willing to loan them money, since in a way the loan is self-liquidating. Even if you have a good credit score, a personal secured loan will mean more money than an unsecured one.
Are There Any Disadvantages?
The main disadvantage when using a secured loan is the risk of loss of asset if a default arises. Some of the assets you can put up as collateral might not matter, like valuables or luxury items. However, losing your house or even your car can be a nightmare.
Most people who take these loans don’t intend to default outright, of course, but many people also take them when desperate, as a last resort when they absolutely need to raise money. Sometimes, they’ll sign loan contracts requiring monthly payments they can’t really afford, simply because desperation forces them to do so.
Although it might seem wiser to put up your savings account as collateral, you may want to think this through. If you put your savings account as collateral, it effectively gets frozen until your debt is paid – meaning you can’t move any money while it lasts. This can be problematic if your savings account contains your emergency stash and something unexpected happens.
Right, One Last Thing… Am I Even Eligible for This?
Yes, you are. Or you probably are. Since secured loans come, well, secured, institutions don’t impose as many restrictions on them as they do with unsecured ones. As long as you own something valuable you can use it as collateral or try to. Financial institutions (or pawnbrokers) will always be the ones who decide whether they’ll take your assets, and how much they can advance to you, but that shouldn’t keep you from trying. Even if on your first attempt you get a “no,” perhaps another bank or lender will agree.
The secured nature of these loans is precisely why many people find them worth it, and why they are the best way to get large amounts of money. Owing money will always be annoying, but we often need money we don’t have, either to pay for emergencies or to invest so we can make more money. Secured loans simply offer us a way to obtain that needed funding with fewer hassles.