Lenders offer secured loans for a large purchase like a home or car, or to someone who may need a smaller cash advance. People whose credit scores have taken a hit for one reason or another can also obtain secured loans much more easily than they can obtain an unsecured loan.
If you’ve had some financial problems in the past, your credit score has probably gone down, even though you may have done nothing to cause the financial crisis in your life. If you couldn’t keep up with credit card payments because you lost your job for example, or filed for bankruptcy because of medical bills, you probably won’t have a high-enough credit score to obtain an unsecured loan for even small purchases.
On the positive side, because you are providing valuable security to the bank for the loan, you may receive a lower interest rate than if you had an unsecured loan.
A secured loan gives you the ability to borrow money, rebuild your credit—or both. You’ll need to guarantee that you’ll pay back the loan by giving the lender an interest or a lien on some property you own. If you own real or personal property that the lender could sell fairly quickly, in the event you cannot pay back the loan, a lender may allow you to use it as security. On the positive side, because you are providing valuable security to the bank for the loan, you may receive a lower interest rate than if you had an unsecured loan.
The lender uses your home or personal property, car, household goods, or jewelry, for example, as assurance that you will repay the loan. If you don’t, the lender can follow a legal process to take the property in payment of the loan. Typically, lenders will require a security interest in exchange for:
Home Equity Loans
A home equity loan is still one of the most popular ways to obtain extra cash. The equity in your home serves as security for these loans. The equity is the market value of your home less the amount of your mortgage. However, because your home is the security for the loan, the bank can foreclose on your home if you default on the loan. Make sure that you can afford to make the monthly home-equity payments. You can lengthen the term of your loan to make your monthly payments affordable. It may help ensure that you won’t lose your home in foreclosure.
Secured Auto Loans
If you own your car and have some equity in it, a lender may give you a loan for some or all of the equity value in your car. Even if you already have a car loan, you may be able to obtain a new loan for a lower interest rate, pay off the higher rate loan and save a bit of money each month on your car payment. If you have a favorable interest rate already, then you can keep that loan and obtain a loan for the extra cash that you need. Beware of a car title loan. Interest rates can top 300% and the repayment period can be very short.
Secured Savings, CD and Stock-investments Loans
If you have a savings account or own a certificate of deposit (CD), you can use either of these as collateral or security against a personal loan. Because the lenders will place a lien on the amount of money you will owe, you won’t be able to access these funds until you repay the loan in full. Even if you pay the loan down to almost nothing, the lender will not remove the lien on the account until you repay the loan in full. Using a savings account as security only makes sense if you are earning a better interest rate than what you are paying on the loan you will take. If your goal is to rebuild your credit score, then paying off a secured loan over about 12 months can help you do that.
Household Goods Like Furniture or Antiques
While typically used furniture of average quality does not have a very high retail value, you may be able to obtain a loan for a portion of the amount a consignment store would be able to sell it for. Boats, RVs or other motorized vehicles often serve as adequate security for smaller, personal loans. However, as with any of the items you use as security, be certain that getting this loan now is worth losing your grandfather’s antique clock if you can’t pay back the loan.
Watch Out And Investigate
There are plenty of scam artists out there just waiting to take advantage of your situation. You should thoroughly investigate any person or any company offering you a secured loan. Compare the interest rates, the fees for opening and originating a loan, the payment terms and missed payment fees and penalties. Currently, there are many reputable, online lenders that offer secured loans as well. Rates vary from lender to lender but the maximum rates can be very high. They vary based on your credit score, the value of the collateral you are putting up and your income.
High pressure sales tactics used on vulnerable people, like students, young adults, older people or people without a lot of experience dealing with financial situations can have disastrous results. Salespeople can be ruthless and operate unethically. At the very least, discuss your plans with a trusted family member or friend who may be able to help you decide if the terms of the loan you are being offered, are fair, reasonable and understandable.
Think about what will happen if you miss one payment or are late to pay. In most situations, the lender can take 100% of what you have given as security, even if you miss a final $5 payment. You need to choose carefully when you give some personal property to the lender as security for the loan. Do you really want to part with it or lose it if you have trouble paying the loan?
Depending upon who your lender is, you may feel reassured that the terms and the transaction itself is legitimate. For example, if you are using a credit union to obtain a secured loan, credit unions are legally chartered entities under the law, stable and insured. They operate for the benefit of their members and usually try to help them, especially in this kind of situation. A few major U.S. banks also offer secured loans but will usually expect you to have a savings account or a CD already established with the bank.