What are secured loans?

Loans are usually unsecured which means you can loan money up to a certain amount and pay it back over a couple of years in fixed instalments. When you want to loan a very large sum of money for a big purchase, you will have to take out a secured loan. Very few people actually take this type of loan because of the risk involved. Taking out a secured loan means that you are guaranteeing the bank or other credit lender that they will get their instalments out of you. You will have to put up some of your possessions as security for the loan. This is almost the same as getting someone to sign surety for you, except in the case of a secured loan no one is going to pay your debt for you. The bank will simply sell the goods you have put up as security to avoid a loss to themselves.

Some of the goods you can put up as security for a secured loan included your house and your car. Should you fail to repay your debt the bank can take ownership of these goods and then sell them to make up for the instalments. If they don’t get full value for these things and they are still short of payment after selling all your secured goods, they could still take you to court to force you to pay up. Sometimes when you take out a secured loan, the interest rates will be lower than when you take out a regular personal loan.

The benefit for the borrower in the case of a secured loan is that he will get a lot more money out of the loan application than he would have if he had applied for a regular personal loan. The downside to this is that he might lose very valuable possessions if he can no longer pay the loan back. The benefit for the lender is obviously that he will have a guarantee of pay back. Although this doesn’t always work, because should the borrower be declared bankrupt, there will be nothing to do but take a loss on the side of the lender.