Understanding Secured Loans

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Understanding Secured Loans

Have you been thinking about buying a new car, a new home, or remodeling your existing home? If you are planning on making a big purchase, chances are you are going to need a loan. Which loan should you choose and why does it matter?

Most consumers are so excited about their new car, the plans for their new home or the renovations that they are planning that they really give little thought to the type of loan that they may obtain from the bank, online or from an independent lender such as a broker who arranges loans and mortgage for consumers. They are just so happy that someone will approve a loan for them, that they take the first one that comes along and really do not question the interest rate offered, the type of loan or the terms of the loan.

Knowing the difference and taking advantage of these differences can sometimes save thousands of dollars for the consumer and this is always a good thing. We all have enough pressures on our budget and saving money is a great way to ease some of that pressure.

What is a Secured Loan

Understanding what a secured loan is can make the difference between affording something and not being able to afford the monthly payments in some situations. Basically a secured loan is one that the client provides collateral in return for obtaining a personal loan at a low interest rate.

Unsecured loans have no collateral for them and are provided to consumers at higher interest rates. Even a 1% difference in interest rates can save hundreds if not thousands of dollars in interest over the life of the loan depending on the size of the loan. The amount saved can be substantial, but then as always there are some ramifications that consumers also need to be aware of.

What is Collateral

When you purchase a car, the car is used as collateral for the personal secured car loan. You own the car and use it as you would any car; however you cannot sell the car unless you pay the loan off first with the proceeds from the sale of the car. If you get into an accident with the car and the car is totaled, the insurance company will pay the unpaid balance of the car loan off first and then give the remainder of the money to you if there is any to give.  Sometimes cars depreciate very quickly, especially in the beginning when you first drive them off the car lot and your car loan payments have not caught up with this depreciation.

This is all very complex and the important thing to remember is that the secured car loan is paid first by the insurance company. If there is anything left over, then you will receive that cash and you will have to purchase another car if your car cannot be repaired.

Your home can also be used as collateral, provided that there is sufficient equity in the home that is not encumbered with another loan or mortgage. Most lenders will want the home appraised to confirm its value and to also confirm what outstanding loans or mortgages are still in force on the home. If there is sufficient equity, consumers can arrange for secured loan with the home as collateral.

Typically lenders will lend up to 75% of a homes value, less what is already owed on the home. So if your home is worth $100,000, and you have a $50,000 mortgage on your home, the lenders will lend up to an additional $25,000 to you provided you meet all of the other requirements in terms of secure job, monthly cash flow, debt ratio etc.

What Happens if I cannot Meet the Monthly Payments on the Secured Loan

Basically you never want to miss a payment or become in default on a secured personal loan. The lender under extreme circumstances could repossess the car and sell it to recover what they are owed on the car. You are out of a car and also have the additional fees associated with the repossession of the car and the sale of the car. You could still owe some money after your car is sold by the lender if it cannot be sold for sufficient value. Often since a car depreciates, there could be still a balance left on the loan and then there are the repossession fees that are allocated to you.

This is a situation you really do not want to have happen. If you cannot make the payments for one or two months, the best thing to do is to speak with the lender and make some kind of arrangement so that you keep the car and they are convinced they will get their money.  Even if you have to borrow money from a friend or your relatives, to make the payments you will be better off than having your car repossessed. If you cannot meet your loan requirements, sell the car and pay off the loan. You will still have your credit rating intact which will help you get a new loan at reasonable rates when the time comes. Otherwise your car is likely going to be repossessed.

Secured personal loans are a great financial tool to help consumers reduce the cost of borrowing money! Some clients have asked about investments they own such as stocks and bonds and whether these can be used as collateral for loans. It turns out that some lenders will accept stock and bond certificates as collateral, however they will only accept them at a fraction of their value, which for most people is not acceptable. Stocks and bonds are just viewed as being too risky with the markets constantly up and down and lenders are just not willing to take the risk of using these type of investments as collateral.

Rental properties which is another form of investment can sometimes be used as collateral. They must have unused equity as well before you can take out a secured loan or mortgage and use the unused equity in them. Some lenders may be a little more strict about the limits of how much equity you need for a rental property, however most will accept them as equity.

At the very least always ask your lender for the most competitive rate when you are taking out any kind of loan, including secured loans. The worst that is going to happen is that they will tell you that this is the best rate, take it or leave it. If they drop the interest another quarter percent to obtain your business, then your question was well worth it since you are reducing your cost to borrow money which is always a good thing!