![]() First of all, for the borrower, a secured loan is riskier. There are also some disadvantages of secured loans for both parties involved. In default, the lender also has a way to recover the loan amount. Similarly, it allows borrowers to receive a loan at a lower interest rate than unsecured loans.įor the lender, a secured loan helps mitigate the risks of default on a loan. ![]() It is particularly useful for borrowers with a bad credit history who cannot get unsecured loans. First, offering an asset as security allows borrowers to obtain a loan without complications. Secured loans have many advantages for both the lender and the borrower. In default, the borrower loses the cash deposit to the lender. 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. Usually, borrowers with no credit history need to provide an asset as security to obtain a credit card. While credit cards are generally unsecured loans, some credit cards require security. This loan can be less risky as the value of vehicles, while still a lot, is not as high as a house. Similar to mortgages, in case of default, the borrower can lose control of the vehicle. Other types of vehicle loans may also include motorcycle and boat loans. ![]() 2) Vehicle loanĪs the name suggests, in this type of secured loan, borrowers put their vehicles, usually their cars, as collateral. This type of secured loan is riskier for the borrower as the asset involved is more valuable. In case of a default, the borrower loses control over the house, and the lender can put it up for auction. In a mortgage loan, borrowers offer their houses as security. The first and most common type of secured loan is a mortgaged loan. The type of secured loan mainly depends on the asset provided as a backing to the loan. Types of Secured LoansĪs mentioned above, there are many different types of secured loans that borrowers can obtain. Usually, the lender will auction the asset to recover the loan amount. If the borrower cannot repay the loan, the lender can claim the secured asset legally. When the lender lifts the lien, the borrower receives back the legal right to the asset. In other terms, the lender will withdraw the lien when the borrower fully repays the loan. The lien stays intact as long as the loan stays active. It allows the lender a legal claim to the asset in case of a default. Once the borrower provides an asset as security, the lender will put a lien over it. On the other hand, with a secured loan, the borrower loses the asset provided as security, thus, increasing the risks for the borrower. The borrower is at a significant advantage for unsecured loans, as defaulting on the loan won’t be as costly as secured loans. Lenders need secured assets for several reasons, most prominently to decrease risks associated with default. When a borrower requests a loan from a lender, the lender requires the borrower to provide an asset as collateral. However, in default, the lender gets the right to dispose of the asset to recover the loan. The asset offered as collateral still belongs to the borrower. In other cases, the borrower has the choice to provide any asset that is acceptable to the lender. 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. Secured LoansĪ secured loan is a type of loan that requires the borrower to offer an asset as collateral to obtain the loan. Ultimately, whether a loan is secured or unsecured depends on the type of loan required by a borrower and the financial institutions offering them. However, most other types may come in unsecured options as well. Some specific types of loans will always be secured, such as mortgages. These loans will fall into two general categories, secured or unsecured. Borrowers can obtain many different types of loans from financial institutions that provide them.
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