There are many types of loans out there, but we generally narrow them down in two categories – secured and unsecured loans. Here, we’ll talk about secured loans.
A secured loan differs from an unsecured one in that a secured loan requires a collateral or “security”, in order for the loan to take place (thus the name). For a borrower to qualify, an asset or property (usually a house or a car) with a substantial amount is surrendered in writing to the lender. Basically, the concept of a secured loan is that if you happen to default on your payments, the lender has the right to seize the collateral.
Though many would raise eyebrows at the idea of securing a loan against property, there are actually quite a few valid scenarios where it makes a lot of sense to get a secured loan.
With an unsecured, personal loan, you can only borrow so much, depending on factors such as your credit rating, your income, and any outstanding debt that you owe. There are absolutely times when we need to borrow so much more, and thus the only solution is to unlock the substantial amount of cash your property holds.
In these times of global crisis, many of us have fallen victims of bad debt and poor credit score. Factors such as sudden job loss, under compensation, illness or disability, loss of a loved one, divorce, and so much more can leave a dent in your financial standing. If your credit prevents you from availing a much-needed loan, perhaps the only viable option is to borrow against your beloved asset, despite knowing the consequences.
In general, lenders love a secured loan because it means less risk for them in shelling out the cash. If you fail to meet the repayment terms of the loan, they could simply take your property. This is why most secured loans have lower interest rates than standard loans.