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Secured loans: what are and how do they work?

A secured loan is a loan where the borrower agrees to set up an asset as collateral for the loan itself, which therefore makes it a secured debt owed to the lender. In the event of default by the debtor, the creditor takes possession of the property used as collateral, and can sell it to recover part or all of the amount initially loaned to the borrower. On the contrary, we will have an unsecured debt, which is not linked to any specific proprietary property. In this case, the creditor can only fulfill his debt to the debtor, as there is no guarantee from the borrower/debtor.
The secured loan usually attracts lower interest rates than the unsecured debt, having the lender more secure; of course, the credit risk of the borrower (his credit history and repayment ability) and the expected returns for the creditor also affect interest rates.

How do secured personal loans work?

When you take out a secured personal loan, you will make available assets that will act as collateral to secure the loan to the lender. This means that the lender will have the privilege of requesting the asset as a loan payment; this privilege remains active until the loan is repaid. If the loan is repaid, the lender releases the privilege. If not, the lender may seize the collateral. The specific point at which a lender will take up the guarantee will vary according to the loan agreement, the type of loan guaranteed and the laws of the state. But in some cases, lenders can take action to take over the property as soon as they get left behind on payments.

What types of goods act as collateral?
To get a secured personal loan, you need to pledge something of value as collateral. Among the assets owned, some could be qualified as collateral: a vehicle, money in a savings account, certificates of deposit, a valuable property (typically car or home). These assets must be properly assessed, so that the lenders are sufficiently guaranteed to repay the loan.

Secured personal loans can be requested from banks or other lenders (including online). To get a secured personal loan, shop around and compare interest, collateral requirements and repayment terms.

So, have you decided to apply for a secured personal loan? Well, first of all we advise you to compare the terms of the loan between different lenders. Here are the things you should definitely pay attention to:

Interest rate
Some secured loans, such as auto title loans, are intended for borrowers with bad credit and are very expensive. Other secured loans, such as home equity loans, usually have lower rates than other types of loans.

Loan term
A shorter repayment period means higher monthly payments, but interest will be lower over time, because your debt will be repaid earlier.

Loan associated fees
Other costs related to the loan could be revealed: application fees, loan fees, monthly fees and costs for the correct economic evaluation of the property. Auto title loans, in particular, tend to have very high fees, which is part of what makes them a bad option for many borrowers.

Monthly payment
Check your monthly costs carefully: do not take out an unsecured secured loan, as failure to comply with monthly payments could result in the loss of the guarantee.

Warranty requirements
Which properties are acceptable as collateral? Some lenders only accept a paid vehicle, others may accept a savings account.

Timing to get the money
In some cases, getting a secured loan over an unsecured loan can be faster: if you use your own CDs or a savings account to secure the loan, you can get the funds within the next business day.

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