Is a Secured Loan a Good Option?

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Secured Loan Definition:

A secured loan is a loan that has collateral attached to it. The collateral stands good for the loan and if you miss payments or default on the loan, then the bank can collect the collateral. This type of loan generally has a lower interest rate because the bank is taking a lower risk because it can collect the collateral if you default on payments. A secured loan can be a good way to build credit if you go through a reputable lender like a bank or credit union.

Types of Secured Loans

  • Mortgages are secured because your home stands as collateral on the loan. If you miss payments, you can go in foreclosure and lose your homes.
  • Car loans are loans that are attached to your car. 
  • Secured credit cards are a third type of secured loan. The bank will usually require you to attach a Certificate of Deposit (CD) or savings account to a credit card. Banks will do this for customers who are trying to rebuild their credit history. The credit limit will be about the same amount as the CD and if you fail to pay, then the bank takes money from the attached CD. you are not allowed to take money out of the CD or savings account that is acting as collateral for the loan.
  • A title loan is when you take a car that is already paid off and use it as collateral for another loan. Generally these loans are small with higher interest rates than other more traditional secured loans. 

    Benefits of Secured Loans

    Secured loans are available to people who have been denied unsecured loans. They are an excellent way to work towards building your credit score. Banks like them because there is less risk involved. The lower interest rates are also an advantage to choosing a secured loan. You should be careful as you choose what you will use as collateral most banks require a home or a car in order to give the loan, although a savings account such as a CD may work, but you will not be able to access that money for the entire duration of the loan.

    A secured loan is a great way to build your credit if you are trying to repair it or you are trying to build your credit history. It is important to make sure you pay everything on time so that you can see a difference in your score. 

    Dangers of a Secured Loans

    The danger of a secured loan is that you may lose whatever you set up as collateral if you fail to make your payments on time. Also taking on too much debt may make it difficult to meet all of your financial obligations. it is important that you carefully consider your budget and ability to pay on the loan before you borrow any money. If you default on the loan or make late payments it can also adversely affect your credit score. 

    Transferring Unsecured Debt to Secured Loans

    If you have unsecured debt, you should not transfer it into a secured loan. Many people do this by taking out a second mortgage to pay off their credit cards or taking out a title loan on their car to pay off other bills. This puts your home or car at risk if you were to default on the loan later on. It is best to work on paying off your unsecured debt quickly. You may want to sell items that you have or take on a second job in order to pay off these types of debt as quickly as possible.

    Many consolidation loans are attached to a home, and it is important to steer clear of this. It will protect you in the long run even if it seems like you may be working on paying off your debt forever. A credit union or a smaller bank may be willing to work give you a unsecured loan to help you lower the interest rate on your credit cards. 

    Managing Your Debt

    It is important to carefully consider the financial aspect of any loan before you get one. Many people simply think about the amount of the monthly payment, but if you want to buy a home soon or refinance, you will want to think about how this affects your total debt amount, and also the limits that the monthly payment will have on your budget and saving ability.

    If you find yourself in a situation where you are struggling to make your monthly payments, then you need to stop borrowing money and work on getting out of debt. A budget will help you get control of your money and see areas where you can cut back on your spending.