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Different Types of Secured Loans and How They Work.

January 12, 2017 by  
Filed under Money/Business, News, Weekly Columns

(Akiit.com) If you’re looking for a loan, you have two basic options – secured and unsecured. The difference between the two is that a secured loan has some type of asset attached to it as collateral, while an unsecured loan does not.

Secured loans benefit both the borrower and the lender. By using a possession as collateral, the borrower is more likely to obtain a loan, particularly if they have bad credit. That collateral may also help the borrower get a lower interest rate. The lender benefits because it’s more likely the borrower will repay the loan, and if the borrower defaults, the lender can seize the collateral and repay it to recoup their costs.

There are several different types of secured loans available.

1. Mortgages

A mortgage is a home loan with a repayment period that can last multiple decades, with 30 years being a standard mortgage time frame. The lender provides the bulk of the money to purchase the home, which you then repay in monthly payments. If you stop making your payments, the lender can start the foreclosure process to seize your home.

The two main types of mortgages are fixed-rate mortgages, where the interest remains constant the entire time, and adjustable-rate mortgages, which start with a very low rate and then changes adjusts every year depending on the market. Adjustable-rate mortgages were a major factor in the housing crash.

Because of the size of a mortgage, you want to make sure you get the lowest interest rate possible. That requires you to maintain a high credit score, have stable income, and save as much money as possible. With all three of those, you can expect banks to pre approve you for mortgages. Otherwise, you’ll have to start the mortgage process before you look at houses so you know what you can afford.

2. Home Equity Loans and Lines of Credit

If you have equity in your home, meaning the home is worth more than you owe on your mortgage, you can borrow using that equity as collateral. You have two options: a home equity loan or a home equity line of credit.

With a home equity loan, you receive a set amount in cash. A home equity line of credit provides you with a credit limit, and you can borrow up to that amount. With both options, you repay what you borrow in monthly payments. If you fail to do so, the lender can seize your home. It’s essentially a second mortgage on your home, just for a much smaller amount.

3. Auto Loan

An auto loan is a loan to buy a specific vehicle, which can be new or used. You can obtain an auto loan through a bank, credit union, or the auto dealership. Dealerships often issue loans with low initial interest rates that go up after a set period of time.

The auto loan is tied to the car that you purchase, so if you fail to make your payments, the lender can repossess your car.

4. Title Loans

Like an auto loan, a title loan is tied to your vehicle. These types of loans are also known as car title loans or pink slip loans, since a pink slip is a term for a car’s title. For these loans, you need to have your auto loan fully repaid. The maximum amount you’re able to borrow with a title loan depends on the value of your vehicle.

Title loans are a fast and convenient option. All you have to do is go to the title loan company and give them your vehicle’s title. After they briefly inspect it, they’ll issue you the loan. You keep the vehicle the entire time, and the lender gives you your title back after you finish repaying the loan.

The major drawback with this type of loan is the cost. Title loans typically carry high fees and interest charges, especially if you can’t repay your loan within the initial repayment period. When you have to rollover your loan, the charges add up quickly.

Each type of secured loan has a purpose, and it’s best to choose a secured loan that matches your specific needs. Obviously, if you want to buy a house or a car, a mortgage or an auto loan are the right choices. If you need a personal loan, you’ll obtain a lower interest rate with a home equity loan or line of credit, but a title loan is fast and only requires that you have a paid-off vehicle.

Staff Writer; Larry Jackson


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