There are many different types of loans that people can borrow from creditors, like banks, microfinance banks, and so on. Even investment funds offer loans, but at a higher interest rate. In most cases, people won’t have to provide any collateral or mortgage. For instance, students won’t have to pay any mortgage upfront while taking out an educational loan. This loan type is termed an “unsecured loan” because the creditor won’t be able to get the money back by using any collateral if the borrower fails to repay the debt.
This is why many creditors offer secured loans. Most people need help understanding the fundamental aspects of this credit type and the advanced aspects. To help you out, we have discussed some of the best aspects of a secured loan that one should know.
What is a secured loan?
From the name itself, you can understand that a secured loan is a type of credit offered based on collateral or a mortgage. For instance, you can give a specific part of your house as the mortgage based on the credit value you need to borrow.
You can also keep your car, business, factory, and several other things as collateral. It will ultimately depend on the creditor, the terms and conditions of the secured loan, and the valuation you want. It is mainly offered to ensure the investment made by the creditor doesn’t go in vain.
Workings of a secured loan
The workings of a secured loan are easy to understand. Every loan is divided into monthly instalments comprising the principal amount and the interest to be paid. If the borrower fails to make the payments, a notice is sent as a reminder for the first and second months. But as the debt amount increases, it becomes impossible for the borrower to repay it by the due date.
As a result, the creditor uses the mortgage to get the valuation and repay the debt the borrower has failed to pay. However, it needs to be done in a legal way where the borrower will be given a final notice from the creditor, and even then, if he doesn’t repay the loan, the mortgage will be forfeited.
Types of secured loan
There are different types of secured loans you can take from the creditor. Some of these are:
- Vehicle loans
- Mortgage loans
- Secured credits
- Bad credit loans
- Life insurance loans
- Car title loans
- Savings-secured loans
- Pawnshop loans
Based on the loan type, the security item varies. For example, if you want a vehicle loan, the concerned vehicle will be given as security. Similarly, you must use your home as collateral for a mortgage loan. For a savings-secured loan, the amount present in the savings account will be kept as collateral for the credit amount.
Advantages of a secured loan for a borrower
It is better to understand the benefits of the secured loan because that will help you decide whether you want to give up something as collateral.
- One of the most significant benefits of a secured loan is lower interest. Usually, the creditors charge a higher interest rate owing to the risks associated with the loan you want to take out. But if you take a secured loan, the creditor can use the collateral to get the required money to pay off the debts. As a result, it will become easier for you to pay off the instalments due to less interest rate.
- Another benefit of a secured loan is that it allows for a more extensive principal valuation than unsecured loans. The creditor knows he can use the collateral to evaluate the back you failed to deposit as the monthly instalments. With this guarantee and confidence, the creditor can quickly approve the loan request with a higher principal amount.
- Equity and mortgage loans are two significant secured loans that will help the borrower apply for tax exemption. It means that the amount you have to pay monthly as the instalment will get deducted from the total payable tax amount per month. Let’s say your annual tax amount is approximately $450. The annual loan instalment you pay is $200. Therefore, you will get an exemption of $200, and the total payable tax amount will come down to only $250.
- Secured loans are usually approved much faster than unsecured loans. Even if you have a bad credit score or the risks associated with the loan request are high, creditors can approve the application if the collateral is promising and can repay the entire debt in case you fail. Therefore, the chances of a secured loan application being rejected are also relatively low.
- Another significant benefit of secured loans is paying money upfront to reduce debt. This will bring down both the principal and interest payable per month in the form of instalments. Therefore, you will have the leverage to save a couple of bucks from that total due every month, and the chances of missing the payment of one instalment will be less.
Disadvantages of a secured loan for the borrower
Although there are several benefits to a secured loan, there are also some disadvantages. Overlooking the drawbacks might lead you to difficult conditions where your judgement can put you at stake. Therefore, to help you gain maximum clarity, we have discussed some of the major drawbacks of taking this secured loan.
- If you take a secured loan, you need to give something as collateral with a value equal to the total repayable amount for the credit. You will only be granted the loan if you have such an asset.
- If you fail to pay the loan amount, the collateral will be forfeited. Unfortunately, you will only be able to get the thing back if you pay the amount later.
- There are times when you may need help to pay the instalments for valid reasons. However, the creditor won’t consider these reasons no matter what.
In this article, we have shared the fundamentals of a secured loan so that you can understand it and how you can benefit from it. Since you know both the pros and cons, it’s your call whether you want the secured credit or the regular one. For further information, you can connect with the experts at Piramal Finance.