Secured loans are those loans that are protected by an asset or collateral of some sort. Secured loans are less risky for lenders, which is why they are normally cheaper than unsecured loans. But they are much more risky for you as a borrower because the loan provider can repossess your home if you do not keep up repayments. The most common type of secured loan is a mortgage, which is secured by the house being purchased. There are different names for secured loans, including:
- Debt consolidation loans (although not all debt consolidation loans are secured)
- Home equity or homeowner loans
- Second mortgages or second charge mortgages, or
- First charge mortgages (although these are unusual).
Common examples of secured loans: Mortgage, Home Loans, Auto Loan, Boat Loan, Recreational Vehicle Loan, Secured Credit Cards, Secured Personal Loans etc.
Advantages
- Interest rates on secured loans tend to be substantially lower than unsecured credit.
- Secured loans typically come with a lower interest rate than unsecured loans because the lender is taking on less financial risk.
- Some types of secured loans, like mortgages and home equity loans, allow eligible individuals to take tax deductions for the interest paid on the loan each year.
Disadvantages
- The personal property named as security on the loan is at risk.
- Typically, the amount borrowed can only be used to purchase a specific asset, like a home or a car.
- The upfront costs such as valuation fees and arrangement fees will increase your expenditure.
