Borrowers can obtain many different types of loans from financial institutions that provide them. These loans will fall into two general categories, secured or unsecured. Some specific types of loans will always be secured, such as mortgages.
However, most other types may come in unsecured options as well. Ultimately, whether a loan is secured or unsecured depends on the type of loan required by a borrower and the financial institutions offering them.
Secured Loans
A secured loan is a type of loan that requires the borrower to offer an asset as collateral to obtain the loan.
Sometimes, the financial institution or the type of loan will also specify the class of asset that the borrower needs to provide, for example, a car or house.
In other cases, the borrower has the choice to provide any asset that is acceptable to the lender. The asset offered as collateral still belongs to the borrower.
However, in default, the lender gets the right to dispose of the asset to recover the loan.
Secured loans are simple to understand. When a borrower requests a loan from a lender, the lender requires the borrower to provide an asset as collateral.
Lenders need secured assets for several reasons, most prominently to decrease risks associated with default.
The borrower is at a significant advantage for unsecured loans, as defaulting on the loan won’t be as costly as secured loans.
On the other hand, with a secured loan, the borrower loses the asset provided as security, thus, increasing the risks for the borrower.
Once the borrower provides an asset as security, the lender will put a lien over it. It allows the lender a legal claim to the asset in case of a default. The lien stays intact as long as the loan stays active.
In other terms, the lender will withdraw the lien when the borrower fully repays the loan. When the lender lifts the lien, the borrower receives back the legal right to the asset.
If the borrower cannot repay the loan, the lender can claim the secured asset legally. Usually, the lender will auction the asset to recover the loan amount.
Types of Secured Loans
As mentioned above, there are many different types of secured loans that borrowers can obtain. The type of secured loan mainly depends on the asset provided as a backing to the loan.
1) Mortgage loan
The first and most common type of secured loan is a mortgaged loan. In a mortgage loan, borrowers offer their houses as security.
In case of a default, the borrower loses control over the house, and the lender can put it up for auction. This type of secured loan is riskier for the borrower as the asset involved is more valuable.
2) Vehicle loan
As the name suggests, in this type of secured loan, borrowers put their vehicles, usually their cars, as collateral.
Other types of vehicle loans may also include motorcycle and boat loans.
Similar to mortgages, in case of default, the borrower can lose control of the vehicle. This loan can be less risky as the value of vehicles, while still a lot, is not as high as a house.
3) Credit cards
While credit cards are generally unsecured loans, some credit cards require security. Usually, borrowers with no credit history need to provide an asset as security to obtain a credit card.
However, instead of requiring a house or a vehicle like the above two types of secured loans, secured credit cards require a cash deposit as security. In default, the borrower loses the cash deposit to the lender.
Advantages of Secured Loans
Secured loans have many advantages for both the lender and the borrower. First, offering an asset as security allows borrowers to obtain a loan without complications.
It is particularly useful for borrowers with a bad credit history who cannot get unsecured loans. Similarly, it allows borrowers to receive a loan at a lower interest rate than unsecured loans.
For the lender, a secured loan helps mitigate the risks of default on a loan. In default, the lender also has a way to recover the loan amount.
Disadvantages of Secured Loans
There are also some disadvantages of secured loans for both parties involved. First of all, for the borrower, a secured loan is riskier.
It is because the borrower may lose the asset compared to an unsecured loan. Similarly, secured loans also mean if the borrower does not have any assets to offer as collateral, they will not get the loan.
While secured loans are less risky for the lender, they do not eliminate the risk of default. Similarly, the asset’s value may change during the loan period due to external factors, so the lender may not completely recover the loan’s value.
Different Between Secured Loans And Unsecured Loans
The primary difference between secured and unsecured loans is that secured loans are backed by collateral, while unsecured loans are not.
With a secured loan, the lender requires some form of collateral (e.g., car title, home equity) to receive their money back if the borrower defaults on the loan. Unsecured loans do not require any collateral and are called signature or personal loans.
In addition to requiring collateral, secured loans typically have lower interest rates since they pose less risk to the lender due to their collateral protection.
On the other hand, lenders typically offer higher interest rates for unsecured loans since they carry more risk for defaulting borrowers.
Other than these differences, both types of loans will usually feature different terms depending on the underlying conditions of each loan agreement.
For example, one type of loan might have a shorter repayment period than another; or one might be lent with a fixed interest rate while another could be variable, or you could even find options such as no-interest payday loans that work differently from traditional secured or unsecured credit products.
Top 10 Tips To Get A Secured Business Loan
- Analyze the business needs and goals: Before applying for a secured loan, it is essential to analyze the goals and objectives of the business. This will help determine the type of loan best suited and if an additional source of funds is required.
- Understand credit score requirements: Secured loans generally require approval of higher credit scores. Make sure to review your credit report and take steps to improve the score to meet the requirements for approval.
- Shop around for different lenders: Different lenders offer different terms and conditions regarding secured business loans. It pays to shop around to find the best deal that meets your needs and budget.
- Gather financial documents: When applying for a secured loan, most lenders require financial documents such as tax returns, balance sheets, profit/loss statements, cash flow projections, and more. Make sure these documents are current and accurate.
- Provide collateral: As part of securing a loan, most lenders will require some form of collateral to approve an application; this could include assets such as real estate or equipment owned by the company or personal assets such as vehicles or jewelry owned by an individual guarantor with ties to the business (generally a spouse).
- Prepare a standard loan package: To make sure all details regarding the loan have been communicated clearly, it is essential to prepare a standard package with all relevant information included, such as repayment terms, interest rate, and more; this should be presented in writing so that both parties are on the same page with regards to expectations.
- Consider alternative sources of funding: In addition to traditional lender options, there may be other sources of funding available such as grants from government institutions or crowdfunding campaigns that could provide additional capital without requiring debt-based financing from a bank or other lending institution.
- Negotiate terms: Be prepared to negotiate with lenders regarding their terms to suit your needs better; this may involve adjusting repayment length or interest rate structures, among other things.
- Consider insurance coverage: Some lenders offer insurance policies that cover possible default scenarios for secured loans; explore these options, if available, to ensure you are adequately protected in case something goes wrong during repayment.
- Remain organized: During repayment, stay organized with all documents related to the e-loan, such as contracts, payment summaries, and more, to ensure smooth execution over time.
List the Top 10 Banks that Offer Secured Loans
- Wells Fargo: Wells Fargo offers secured loans that can be used for virtually any purpose, such as debt consolidation and home improvements. They offer flexible repayment terms, competitive interest rates, and no origination fees or prepayment penalties.
- Bank of America: Bank of America offers secured and unsecured personal loans with competitive interest rates and flexible repayment terms. Loan amounts range from $1,000 to $50,000, depending on the borrower’s creditworthiness.
- U.S. Bank: U.S. Bank offers secured loans ranging from $500 to $25,000, depending on the borrower’s credit score and financial strength. Repayment terms range from 12 to 60 months; interest rates start at 5%.
- Chase: Chase offers secured loans with amounts up to $100,000 depending on the borrower’s circumstances; repayment terms range from 12-84 months with a fixed APR of 4.99%.
- CitiBank: CitiBank provides secured loans for up to 85% of your home’s equity with no closing costs or application fee; their Secured Loan Program lets you borrow up to $50,000 at a fixed rate as low as 5%.
- PNC Bank: PNC Bank offers secured loan amounts ranging from $1,000 – $50,000 with no origination fees; interest rates are competitive, and repayment terms can be tailored according to the borrower’s financial circumstances.
- SunTrust Banks: SunTrust Banks offers a variety of secured loan products for business owners looking for capital, including term loans and lines of credit; they offer competitive interest rates and flexible repayment schedules that can help meet your needs without over-borrowing beyond what is necessary for success.
- Navy Federal Credit Union: Navy Federal Credit Union provides its members with access to secure financing options such as debt consolidation loans that allow borrowers to consolidate existing higher-interest debts into one lower monthly payment at a fraction of the cost; they also offer attractive interest rates on these products which makes them ideal for those looking to save money over time in addition to consolidating their finances into one manageable monthly bill payment schedule.
- Fifth Third Bank: Fifth Third Bank provides its customers with access to secure financing options such as Home Equity Lines of Credit (HELOC) which allows borrowers flexibility in how they use their funds while taking advantage of either variable or fixed APR on their needs.
- TD Bank: TD Bank is another excellent option for secured lending, offering personal loans ranging from $ 2,000 to $ 50,000; these come with competitive interest rates and flexible repayment fields.
Conclusion
Secured loans are loans in which the borrower provides an asset as collateral. The lender puts a lien on the asset, giving them a legal claim. In case of a default, the lender can sell the asset to recover the loan’s value.
There are several types of secured loans based on which asset the borrower provides as security. Secured loans can have advantages and disadvantages for both lenders and borrowers.