What Are Secured Loans and How Can You Benefit From Them?

What Are Secured Loans and How Can You Benefit From Them?

Most consumers can’t afford to make huge purchases using cash. Instead, they use different types of credit and loans to purchase things like homes, cars, jewelry, or college education. Taking out a secured loan is just one of the options available, but it’s a popular option. Read on to find out what secured loans are and how they can benefit American consumers.

What Are Secured Loans?

Secured loans are loans that require collateral. This collateral could come in the form of a piece of property or another valuable asset. Putting down collateral gives lenders the security that they won’t lose their investments, which means most will be willing to lend larger amounts of money. This makes secured loans one of the more attractive borrowing options available to consumers who have to make large purchases.

Types of Secured Loans

Some of the best-known types of secured loans include mortgages, home equity loans, and home equity lines of credit, which all allow homeowners to use their real estate as collateral. Auto, boat, and RV financing often comes in the form of secured loans in which the newly purchased vehicle acts as collateral, while title loans let borrowers get access to cash by using their vehicles’ titles as collateral. The last of these loans are typically short-term, small scale loans.

Benefits of Secured Loans

The most obvious benefit of financing a car or a new home is that it allows consumers to start making good use of these assets before they have fully paid them off. That’s not the only benefit of secured loans, though. Here are a few more worth noting:

Borrow Larger Amounts of Money

For most consumers, it wouldn’t even be possible to find a lender willing to let them borrow enough cash to make a large purchase like a home or a nice vehicle. Secured loans allow borrowers to access much larger amounts of money since lenders can be confident that they will get their money back. If the borrower stops making payments, he or she will lose the collateral, which will go to pay back the creditor.

Lower Interest Rates

Most secured loans have lower interest rates than unsecured loans since the lender doesn’t have to take on as much financial risk. That means consumers have to pay less money each month and it won’t take as long to pay off the mortgage, car loan, or another type of secured loan.

Longer Repayment Terms

Secured loans usually have much longer repayment terms than unsecured loans. The monthly payments, even for purchases as large as houses, are typically quite low, and borrowers can use the rest of their income to pay for living expenses, make other, smaller purchases, or even invest in the markets to take full advantage of their liquid assets.

Help With Building Credit

The barriers to qualifying for secured loans are usually lower, which means consumers with bad or no credit can get them more easily. They can then start building credit to make it easier to take out unsecured credit cards, get financing, or take out other types of loans.

The Bottom Line

Secured loans aren’t appropriate for every situation. For minor financial hardships, a small, unsecured personal loan may be a better fit. For those who want to make large purchases, though, secured loans are the way to go.