What is a Secured Loan

A secured loan is a loan backed by collateral, which is property of sufficient enough value to cover the principal of the loan should the borrower fail to repay.

Some types of secured loans are very common. With mortgages and car loans for example, you agree that the property you are buying will act as collateral to secure the loan.

However, the collateral does not always have to be the property the loan is being used to purchase. You may already have the property you can use as security for a loan – often, this is property like a long-term investment portfolio or an art collection that you don't want to liquidate to simply make a purchase in cash. Instead, you would like to keep that property intact but use its value to borrow against for your new purchase.

From the lender's point of view, having that property as collateral makes them more confident in lending money. As a result, they should be more likely to make the loan, and to offer more favorable terms.

What Can You Use to Secure a Loan?

In theory, any property of value can be used to secure a loan. In practice though, lenders are looking for property whose value is easy to establish and which can be readily seized if you default on the loan.

Mortgages are secured loans. This is not only true when you use one to buy a home, but also when you borrow against the equity in your home with a cash-out refinance loan, a home equity loan, or a home equity line of credit. If you have equity in your home and you are confident in your ability to repay a new loan against that equity, then borrowing against your home has a couple of clear advantages over other secured loans. It is likely to represent the largest amount of potential security you can offer and thus allow for higher loan amounts. Also, securing your loan with home equity is likely to result in a much lower interest rate than other forms of secured loans.

If you don't have equity in your home, cars are a fairly common form of loan security. This depends on your having built up some equity in your car, meaning that the car is worth substantially more than you already owe on it. You may be able to borrow against that equity through a new loan or by refinancing your existing loan.

If you use a car to secure a loan, just be sure to distinguish between auto title loans and auto equity loans. Auto title loans require little in the way of a credit check but they generally carry exorbitant interest rates and severely limit the amount of your car's value you can borrow against. Auto equity loans with stricter qualification standards are likely to carry a lower interest rate if you qualify, but even then these are an expensive way to borrow money and should only be used for short-term emergencies.

Another fairly common form of security for a loan is a bank account, such as a savings account or a certificate of deposit (CD). Generally speaking though, it does not make sense to borrow against a bank account rather than just use cash from that account, because you will probably pay much higher interest on the loan than you will be earning in the account. However, if you have a long-term CD at a decent interest rate, it may make sense to borrow against the CD rather than cash it in if this allows you to avoid an early withdrawal penalty, especially if the loan is for a very short time.

Other property, such as boats, art collections, etc., may also be used to secure a loan. However, this is possible only if the property has substantial, verifiable value, and much less common forms of security are likely to significantly restrict which lenders will work with you.

Feature Source: SilverCashFinance.com