A secured loan is a bit harder to arrange with the bank. But the payoff is a lower interest rate since the purchase serves as collateral, protects lender from default.
Secured Loan Definition
A secured loan differs from a regular loan, or an unsecured loan, in that the lender is guaranteed compensation from the borrower in the form of collateral. Thus if a buyer were to finance a house or vehicle through a secured loan from their bank, the bank would assume ownership of the house or vehicle if the buyer were to default on their debt payments. Since this method of lending money ensures that banks are almost never at a loss, secured loans have naturally become one the most popular transactions when it comes to major purchases.
Why Secured Loans Work for Consumers
For consumers, the advantages of a secured loan lies in reduced interest rates and the willingness of banks to hand out heftier sums of money. Since collateral is guaranteed in the worst case scenario of a default, banks generally view secured loans as low risk investments and therefore charge significantly lower interest rates on purchases that are carried out through such loans. Apart from lower interest rates and the ability to borrow larger sums of money, secured loans are often the only option for young buyers who are just starting to build up their credit rating. As major purchases like buying a home require substantial amounts of capital, young buyers, or prospective borrowers with less than stellar credit ratings, are often denied unsecured loans as they are viewed as a too big of a liability by the banks.
Disadvantages of a Secured Loan
One of the perceived drawbacks of secured loans is that they generally take longer to obtain and require more paperwork since there is collateral involved. Thus, many consumers opt for quick unsecured loans for short term use, such as when borrowing funds for home renovation, or to cover various medical costs. As well some consumers with a high credit rating choose to take out unsecured loans when purchasing a new car, and are given permission by their bank to do so. Yet despite their drawbacks in terms of convenience it is generally recommended that one plan ahead and apply for a secured loan in order to reap the benefit of lower interest rates.