What Is A Secured Loan & How Does It Work?

Habari Financial Services - Loans - What Is A Secured Loan & How Does It Work?
Secured Loans

If you want to borrow money, chances are you’ve already started scoping out options that could work for you. Loans are a popular choice for many consumers, and they come in two forms – secured and unsecured. But the differences between the two aren’t always clear.

In short, secured loans require collateral while unsecured loans do not. You’ll also find that secured loans are far easier to qualify for and generally have lower interest rates as they pose less risk to the lender.

Still, they may not be the best option for you and could have serious consequences for your credit and finances if you’re unable to repay what you borrow.

Secured loans are debt products that are protected by collateral. This means that when you apply for a secured loan, the lender will want to know which of your assets you plan to use to back the loan. The lender will then place a lien on that asset until the loan is repaid in full. If you default on the loan, the lender can claim the collateral and sell it to recoup the loss.

It is important to know precisely what you are promising and what you stand to lose before you take out a secured loan.

Secured loan vs. unsecured loan

Some loans, such as personal loans, can be either unsecured or secured, depending on the lender. If you don’t qualify for the unsecured option or you’re looking for the lowest possible interest rate, check to see if the lender offers a secured option for the loan you’re interested in.

When it comes to choosing a secured versus an unsecured loan, there are multiple factors to consider. Here are a few key differences between the two, along with benefits and drawbacks of each loan to consider.

Types of secured loans

Lenders want to know that they have leverage once you walk away with their money. When they place a lien on your collateral, they know that in a worst-case scenario, they can take possession of the assets you’re using as collateral. This does not guarantee that you will repay your loan, but it does give lenders a greater sense of security and gives the borrower more impetus to repay the loan.

Types of loans that are secured include:

  • Mortgage: With a mortgage, you put your home or property up as collateral to buy that home. If you fail to make the payments, your home can be foreclosed on.
  • Home loan: A home loan gives you access to your home equity in the form of a credit line, like a credit card. This loan, you also put your home up as collateral.
  • Auto loans: When taking out a loan to pay for a car or any other vehicle, your vehicle will be used as collateral. If you don’t make the payments on time and in full, your vehicle could be seized.
  • Loan for land: A land loan is used to finance the purchase of land. This type of loan uses the land itself as collateral.
  • Business loan: Business loans can be used to buy equipment, pay wages or invest in business projects. When you take out a business loan, there are a number of things you can use as collateral. For example, inventory, equipment or your land or building can be used to secure a business loan.

What types of collateral are used to back a secured loan?

Secured loans are usually the best way and often the only way to obtain large amounts of money. Nearly anything can be accepted as collateral, as long as it is allowed by law. Lenders prefer assets that are easy to collect and can be readily turned into cash. What you use as collateral likely will depend on whether your loan is for personal or business use. Examples of collateral include:

  • Real estate, including equity in your home.
  • Cash accounts.
  • Cars or other vehicles.
  • Machinery and equipment.
  • Investments.
  • Insurance policies.
  • Valuables and collectibles.

How to apply for Secured Loans at Habari Financial Services?

The following link can be used t access and apply for a secured loan

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