Whether you’re looking to buy your daughter a safe car to take to college or you want to grow your business, you’ll need money. Having money saved or an unsecured line of credit for these purposes is the ideal.
So what do you do if you don’t have ready cash and most of your money is locked up in investments you’d rather not sell? You can still get a line of credit. It’ll just be one of the several varieties of secured loans.
Secured loans aren’t drastically different from unsecured loans. There are still some things you need to know before you sign the loan agreement.
What Are Secured Loans?
Remember that kid who always made you give them something of yours before they’d let you borrow something? That is the most primitive form of a secured loan. You offered up an object of value and your friend lent you something.
Secured loans work the same way. You put up something valuable as collateral, and the bank gives you a loan in return. A mortgage or car loan are common types of secured loan.
Benefits of a Secured Loan
Banks like secured loans because they reduce the risks to the bank. This means they are often willing to provide a secured loan even when they won’t give you an unsecured loan.
Secured loans that are taken out against homes can provide access to larger lump sums of money. If you wanted to start a business, a secured loan is one way you might help to finance the startup.
The repayment period is typically longer than on an unsecured loan. If you’ve borrowed a large amount, you might have a repayment period of 20-25 years. Secured loans also tend to have lower interest rates.
Pitfalls of a Secured Loan
The biggest pitfall is that you jeopardize a piece of your property. The bank can seize the property if you become unable to pay the loan down the road.
The loss of a vehicle might not be disastrous, but the loss of your home likely would be. A secured loan is a calculated risk that you won’t become disabled or go broke for the entire duration of the loan.
You generally need to own the collateral outright before you can take out a secured loan on it. Say someone took out an FHA loan Kansas to buy a home and are still paying on it. That person might be able to take out a second secured loan on the property, but not right away.
For anything less valuable than a home, any existing secured loans will probably disqualify you from additional borrowing against the property.
Secured loans provide you one way to secure a lump sum of money. They can be easier to get but come at the cost of placing your personal property at risk. You need to weigh that risk against the benefits you expect to get from having access to the money and make the decision that’s best for you.