Secured Loans: What Are The Types And Advantages?

If you have valuable collateral, then you can take out a secured loan by pledging your collateral. One of the advantages of taking out a secured loan is that it usually has a low interest rate in comparison to unsecured loans. However, the rate of interest may vary according to the loan amount, loan type, the value of the collateral and the loan term.

Types of secured loans

There are different types of secured loans based on the purpose they serve. They are discussed below.

1. Purchase mortgage loan: A mortgage loan helps you to buy a real estate, wherein your property is used as the security for the loan amount.

2. Second mortgage loan: You can take out a second mortgage on your home even if you have an existing mortgage on it. In this case, you need to obtain the second mortgage against your home equity.

2 types of second mortgage loans are described below.

• Home equity loan: Home equity loan is a type of second mortgage that you can take out by using the equity in your home, which serves as the security for the loan amount.

• HELOC: Home Equity Lines of Credit or HELOC is a type of second mortgage loan that you can take out against the equity in your home in order to make improvement on it.

3. Car loan: You need to use a valuable asset as collateral in order to get an auto loan. Apart from your home, the car that you’re buying can also be used as the collateral.

4. Secured credit card: If you’re not able to obtain a credit card, then you can get a secured one. It is much easier to obtain a secured credit card but it requires a security deposit. Usually, the credit limit on your card is equal to the amount deposited in your savings account.

5. Secured personal loan: You can take out a secured personal loan by pledging any valuable asset (such as, your vehicle, home, expensive jewelry, etc.) against your loan amount.

Some secured loans may be non recourse in which, a lender cannot claim more that the collateral if the borrower defaults on the loan. As for example, if you default on a non-recourse mortgage, then your lender can only foreclose the property. He/she will not be able to take any other legal actions against you to recover the deficit amount that you might owe on the property.

Secured loans – Advantages

The advantages of taking out secured loans are discussed below.

1. You can get low interest rate in comparison to secured loan 2. You can sell a collateral to pay off your secured loan 3. You may get fast approval depending on the lender you work with 4. You can have your loan modified in order to make it affordable

In spite of the above advantages, there is one major disadvantage of taking out secured loans. You may lose your property if you default on your loan or if you’re not able to repay your loan within the stipulated time. Therefore be careful while taking out secured loans.