Is a Secured Loan Right for You?

It's the age-old way to borrow money, updated a bit for today's standards. Many people in need of cash for whatever reason look into secured loans. They are often easier to obtain than other types of loans since poor credit scores don't matter as much- you're offering collateral to ensure you pay up.

This is exactly why debtors must be careful when it comes to secured loans. It's not just a foolproof way to get the money you need. The chance of losing your collateral can become all too real. So do your research before you take the plunge.

The most typical type of secured loan is that in the form of a house loan (a mortgage) or an car loan. The bank or financial institution fronts you the money for the purchase, and if you don't pay up, you lose the house or car. Thus, your loan is secured by the item itself. Although a bank that ends up repossessing a vehicle after it's been driven for six months will not be able to get the same resale value out of it and will probably lose some money, it's the principal of the thing that matters most. If you don't pay on it, you don't keep it. Homes and vehicles that are repossessed by the banks are usually sold at auction. The money received is applied towards the balance of the loan, and the debtor is still responsible for the rest.

In some cases, it's possible to borrow money against your possessions, using your home or car as collateral. This is where it can get risky. If you need cash for things like home improvement or debt consolidation, using your home itself as collateral means, quite simply, that you could lose it. Since loans like this usually require the collateral to be worth more than the amount borrowed, you could end up losing a very valuable possession for the sake of a much smaller amount of cash.

Secured loans of any type have various terms. Auto loans traditionally have five year terms, and a home loan can be stretched over twenty years or more. The amount of interest on a particular secured loan is also variable and depends on factors like the market, the amount borrowed, and the borrower's credit standing.

If you're taking out a secured loan on a new purchase, be prepared to pay up in order to keep the collateral item in your possession. And if you're borrowing against your home's equity, or using another valuable item as collateral, keep in mind that you're dealing in some serious business. Secured loans can be a fantastic way to get the cash you need for whatever reason. Just make sure you take them seriously. The bank certainly will.