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Secured Loans - So What Are They?

Aug 17, 2007
Secured loans are loans that a borrower secures with collateral. Collateral is something that the lender can seize to use to pay off the debt should the borrower default. Lenders prefer secured loans since there is some safeguard that no matter what they will get at least part of their money.

The two most commonly recognized secured loans are home loans and auto loans. In both cases the loan is secured with the item being purchased. Should the borrower fail to pay the lender will take ownership of the home or auto and then resell it to recoup their money.

Getting a secured loan is much easier because the lender does not have to assume as much risk as with an unsecured loan. They will still check credit reports and require borrowers to meet certain criteria; however, the whole process is much easier than with an unsecured loan.

Lenders also like secured loans because the borrower has something at risk too. Instead of the lender assuming all the risk, the borrower now shares in that risk and so they are more likely to honour the contract. The borrower is fully aware should they default that they are at risk for losing their collateral.

Also if you suffer from credit problems, such as county court judgements, bankruptcy and defaults then it is a lot more difficult to obtain unsecured credit. But as said previously with a secured loan the lender has security and will be more willing to lend on this basis. The same is true if you are self employed and have trouble proving your income.

Secured loans can be obtained for any purpose. However, as mentioned home loans and auto loans are the most common. These things, though, can be used as collateral for other loans. With homes, they build equity, which is essentially the value of the home minus what is still owed on it.

Homes go up in value over time, so home owners can borrow against their equity. This is still using their home as collateral. Autos on the other hand depreciate, or go down in value as time goes on so they are usually not acceptable for use as collateral except for the case of an auto loan.

Other things can be used such as investment moneys, expensive jewellery and other things of value, as long as the value meets or exceeds the value of the loan and the item is not going to go down in value.

People get secured loans for many reasons. They get them to make home improvements, consolidate debts and buy new items. As long as the loan is secured with collateral and the borrower pays according to the contract, the secured loan is a great resource.

Secured loans can be risky for borrowers, but they are also good because they are easier to get. However, the borrower must always keep in mind that they have risk involved in a secure loan.

Lenders are not hesitant to take collateral should the borrower default. As long as a borrower intends on honouring the contract then there should be no problem with a secured loan.
About the Author
James Copper writes on all areas of finance. He works for Any Loans who offer Secured Loans and Personal Loans to UK homeowners.
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