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Topics In Secured Loans Explained

Jun 19, 2008
Secured loans are a staple in the loan industry. They are perfect for both sides of the fence- with consumers getting lower interest rates, and lenders getting less risk in the equation. As compared to other options, this route seems quite beneficial for consumers- although there are some tips to keep in mind.

The principle of the secured loan is simple: the consumer offers an item in their possession up for collateral in case they default on the loan. Property is a perfect example of collateral that lenders are more than happy to accept. For smaller loans, cars or other vehicles will usually suffice. Jewelry and other goods that can be valued accordingly to the loan amount are also viable solutions.

The opposite of the secured loan would be the unsecured loan. Unsecured loans function in much the same way, although they do not feature any type of collateral. The lack of collateral commonly raises interest rates for consumers. Consumers with pristine credit scores may be able to get by without much effect, but those with basic or poor scores will see much higher interest rates as a result. Thus, unsecured loans are less popular.

Consumers won't always be able to have some form of collateral to offer. While most may have a vehicle, losing it would essentially put them in a tight situation. In such cases, they can still get a secured loan at select lenders by offering their savings account as a form of collateral. In the even of the consumer defaulting, the savings account funds are frozen- although it will still continue to collect interest. The funds become unfrozen as soon as the borrower makes the payments owed to the lender.

If the traditional route to collateral is taken, the consumer may face repossession or foreclosure actions. Both cases are simply actions taken by banks and lending facilities when consumers don't make payments on their loan. In such a case, their collateral is repossessed, auctioned, or sold as the lender sees fit. Consumers can commonly negotiate with the lender in order to obtain the collateral back, although this doesn't always happen and the borrower may indeed lose their property or valuables.

It is commonly said that a secured loan is a risk to the lender. But in reality, it's also a risk to the borrower. If the borrower won't be able to pay the loan off, their credit score will plummet and they are subject to losing their collateral. To help avoid such an event, borrowers should avoid taking out loans in the first place, unless they are completely sure they will be able to pay it off in due time. After all, losing just one payment can create a world of debt and poor credit ratings for consumers.

In Conclusion

In the end, the secured loan is a good option for anyone in need of money. Where possible, it's best to steer clear of loans altogether so as to minimize risk or debts. But life isn't always as forgiving, and when the time comes, knowing what to expect from the average secured loan will do wonders for those in need of a loan.
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