What is a Secured Loan?

You hear terminology on loans often. You may have heard of unsecured loans, personal loans, secured loans, payday loans and a variety of other loans that may all sound tempting but each have their own different implications.

Of all of the loan types, secured loans represent the lowest interest rates for people of any credit risk, they represent the lowest financial risk for the lender and although they have an inherent risk to the borrower that will be mentioned later, they are one of the best loan types for things like loan consolidation and other large loans that require monthly payments at low interest rates.

 

Why "Secured"?
A secured loan is a loan taken against the equity of your home. It can be taken against the equity of other items you own, like a car or jewelry, but in general it is taken off home equity since the home is usually the item you own with the most value.


It is considered secured because lending companies are far more reassured that you will pay them back. They essentially have "claim" on your home if you do refuse to pay it back and default on the loan, and this gives them enough confidence to offer you a lower interest rate.
Interest rates, loan amounts and payment plans are all based on the amount of confidence that a lender has that you will pay them back. They raise the interest rate when there is a heightened risk due to a poor credit score.


However, because the loan is taken against your house, a great deal of confidence is replaced. The lenders know that you are not going to want to lose your house, so you will most likely pay the loan back, and they are willing to drop the interest rates and give you a more affordable loan. They are even willing to lend you more money provided the equity in your home can cover the costs.


Why Would You Want to Take a Loan Against Your House?


While securing a loan against your house sounds riskier, the truth is that it actually poses less risk to you provided you have some income and can budget correctly. Because secured loans have lower interest rates , you can make lower payments which significantly reduces the likelihood you will default. In other words, it becomes very unlikely you will lose your house, and your ability to make payments is raised.


Similarly, you can use secured loans to cover the costs of debts you already have. This is called debt consolidation, and it potentially can lower your interest rate for all of your loans and limits the amount of places you need to pay back to a single monthly payment.

All of these are why secured loans are preferred over unsecured loans, which are loans that often have high interest rates due to the high degree of risk that a person puts loan companies through should the loan company choose to take on their loan without some kind of collateral. And for those with poor credit, a secured loan is one of the only ways you can get an affordable interest rate and the loan amount that you need.




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