Secured Loan for a Longer Repayment Schedule and Attractive Interest Rate

by admin on December 4, 2013

Secured personal loans offer many advantages such as longer terms of repayment and attractive interest rates. This makes monthly payments more affordable, and borrowers are less likely to default.

Types of Secured Financing

Borrowers can choose from different types of loans depending on their needs, amount required, their credit score, and other factors. Customers are offered several types of debt financing – secured lines of credit, home equity and nonrecourse loans, mortgages, car title loans, and others. The debt becomes secured under a judgment lien, statutory lien, or a formal contractual agreement.

Common examples are car loans and home mortgages whereby the financial institution has the right to institute repossession or foreclosure proceedings.

Features of Secured Loans

A common feature is the fact that collateral is required. Applicants can use their home equity, vehicle, equipment, collectibles, and other assets as collateral. Secured personal loan is typically used to finance the purchase of a car, boat, expensive equipment, and real estate. It is also used for home renovations, improvements, and extensions that increase the market value of real estate. The main benefit for borrowers is that they are offered a large lump-sum amount. The interest rate is also lower because banks take less risk. The fact that collateral is used to guarantee repayment makes it possible to get approved for a higher limit. Another advantage is that the interest paid may be tax deductible.

Differences between Secured and Unsecured Debt

There are some common features of secured and unsecured debt. One is that defaults and missed and late payments are reported to the credit bureaus. Both types of financing are offered by credit unions, banks, finance companies, and other non-bank entities. At the same time, customers with poor or average credit often resort to secured loans because they are not considered creditworthy by financial institutions. Banks have the right to seize the collateral. With unsecured debt, they rely on the terms of the agreement, and the only recourse may be to file a court case. This is a costly and time consuming process for financial institutions. Most lenders are willing to negotiate with borrowers and modify the terms and conditions.

Turning Unsecured to Secured Debt

Some borrowers do this to consolidate high interest debt into a single loan with a lower interest rate and longer repayment term. The problem is that the asset attached will stand good for the outstanding balance. Even if you were to declare bankruptcy, there are ways to work it out and keep your vehicle or home. Debt consolidation is usually done to secure a fixed or lower interest rate, making payments more manageable. In some cases, loans are also bought at a discount. This happens when the borrower is in danger of default or bankruptcy. Alternatives to debt consolidation include settlement and credit counseling.

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