In the last couple of months, my family has run into what seems like every financial roadblock possible. Though we work hard to keep our heads above water, there are times that there is nothing more that we can do to prevent some financial problems. More times than I care to count, we have found ourselves considering loans and how they might help us improve our lives, even if it is just to ease the burden for a moment.
As much as I wish it were not true, we are not alone. Financial stress and difficult times seem to affect a lot of people, and they always have. Why else do you suppose there are so many available loan options and lenders? It would not be such a large industry if only a few people needed it.
While there is no shame in needing help, loans tend to be a bad move for many people. From my experience, I believe that is because many borrowers do not necessarily understand the loan that they are receiving, do not understand the different loan options, and sometimes because they simply cannot repay it.
At times, borrowers are not even sure what they need to apply for, and this is often due to a lack of clarity on the numerous terms and what all of these loan options really are. I have quite a few friends that have complained that the loan industry is an overwhelming and confusing place. If you have ever tried to navigate it blindly, you can most likely relate.
We want to make sure you have all the clarity you need to make good financial choices, so we put together this little guide on one type of loan that many have heard of but few fully understand secured loans.
Everything You Should Know About a Secured Loan
A secured loan is a loan for which you temporarily trade ownership of something, i.e. collateral, in exchange for the borrowed money. The lender requires collateral for secured loans so that if you do not pay as you should, they have the right to sell your collateral. This prevents them from risking much more than the time it will take to repossess and sell the item.
A secured loan is not always as handy as an unsecured loan, as you will see as you read through this article. They require extra paperwork, extra consideration, and often extra time. In addition, the borrower is not always receiving the full amount of said loan. Secured loans do have their purpose and place though, and they have helped many a borrower improve their financial state. They provide an avenue of borrowing for people whose credit history and score block all other ways.
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What Type of Credit Score Do I Need to Be Approved?
In short, pretty much any score. The beauty of a secured loan is that, generally speaking, your credit will not prevent you from getting approved. While lenders differ in their requirements, your credit score is often one of the lowest factors in a secured loan credit decision. The collateral you can provide and your ability to repay are much bigger factors. If you have some type of collateral that is valuable, which we discuss shortly, you will likely have no trouble locating a lender.
Though it is usually not a big factor in the approval decision, a secured loan with bad credit might affect your interest rate, loan repayment terms, and the collateral required. The lower your credit score, usually the higher your deposit or required collateral. Sometimes, you have to put an equal amount of collateral as what you borrow. For instance, if you get a secured loan through a bank for $500 and your credit is bad, the bank may require you to put $500 in an account that cannot be touched until you pay off the loan.
This means that if you are looking to get a loan to actually use for your bills, a secured loan may not be the best option. I mean, if you have to put the entire amount you will borrow up to for collateral, you are basically just swapping the money over. If you can afford to put up that amount of collateral, however, secured loans are a great way to build your credit. Although you have put up collateral, the financial institution will report your payments to the credit bureaus. Additionally, over time, your collateral may be released, or you may be able to take out the same loan without collateral after you pay the first one off.
What Can a Secured Loan Be Used For?
A secured loan is much like any other type of loan when it comes to using it. What you use the loan for is pretty much up to you. However, due to the fact that it is secured, it is best to consider this type of loan solely for the purpose of building credit. While you can use the funds for anything, keeping credit as your main goal is a wise move.
For instance, when I started trying to rebuild my credit a few years back, I was only able to qualify for a secured credit card at the time. Secured credit cards are built on the same principle as secured loans, meaning that they require collateral. I was approved for a $200 limit but had to put a $49 deposit down as my collateral.
In truth, the additional $150 that was left on the card would not go far, especially since they also took out a $39 annual fee. Instead of relying on it for needs, I simply used it as a way to build credit. I would pay the balance in full every month, and then, after the billing cycle closed, I would use the full amount to pay what I could. I would then pay it off before the end of the billing cycle so that I was not paying monthly interest.
Since I only used the card when I had the cash to back my payment, I did not get behind. Instead, this small credit limit helped build my credit up to the point that I could then get a small unsecured loan. Viewing a secured loan as nothing more than a way to build credit should help you use it responsibly instead of getting in any further debt.
What’s the Difference in a Secured Loan and an Unsecured Loan?
The word “secured” has been used in many different ways, so the definition can easily be skewed. The difference in a secured loan and an unsecured loan is very simple: a secured loan requires collateral while an unsecured loan does not. We are going to break this explanation down a bit farther for good measure:
Let’s say your cousin asks to borrow $100 for gas and food until payday. You know his reputation and that he does not normally repay loans. He has done such a poor job with his finances in the past that no one in the family is willing to open their wallets. He has even borrowed money from you before and not paid you back. Logically, you know it probably is not a wise move but you still want to help him out. What do you do?
You could just give him the money, either as a gift or as a loan that you hope he repays. This is an unsecured loan. The other option is that you could say, “Sure, I can help you out. I will loan you $100 but I need to hold onto your laptop until you get paid. When you repay me, you can have your laptop back.” Though you may not want to, if he fails to repay you, you can use the laptop to recoup your losses. This is a secured loan since you are holding ownership for one of his belongings until the loan is paid off.
If you were truly offering this secured loan, it would be very smart to get the terms in writing and notarized so you cannot be accused of stealing property. If you are anything like me, you love your family but have learned not to blindly trust them. Always be diligent when it comes to your finances, regardless if you are borrowing or lending.
What Type of Collateral do You Need?
This really depends on the financial institution you are getting the loan from. Both payday loans and title loans are secured loans. With a payday loan, the collateral is the check you fill out and give them. If you do not pay, they can simply deposit the check into their account and get their money back. With a title loan, the title to your vehicle is the collateral. If you do not repay the loan, they have the right to take your vehicle. The are other types of collateral as well such as cars, a home, and more. It is possible to find a loan for pretty much any asset you might own.
Be very careful when taking out this kind of Loan. If you can’t pay it back you risk losing you asset. You need that car to get to work! This is the case with Title Loans.
When A Secured Loan Makes Sense
- Mortgages are secured given the house is the collateral if you can’t pay back the loan you foreclose and lose the house.
- Auto loans are secured because like a home loan, if you don’t pay it back, you lose the asset.
There are cases where you can use your asset to get another loan such as a line of credit. You might have property that you do not even realize is very valuable. About five years ago, my husband and I decided to purchase a piece of land and the mobile home that came with it. Looking at this property, we knew it was not worth much, but it was a start in the home ownership path we wanted to take. The plan was to eventually build a house and tear down the mobile home.
Over time, we began to see what a money pit it was and began weighing out our options. We feared that since the piece of land was small and needed a lot done to it that we would never be able to resell it. We honestly assumed that it was worth no more than a few thousand dollars. Then, just last year, I had to gather some paperwork related to my property from the courthouse. To my utter amazement, the stated value on this paperwork was almost six times as much as we believed.
The Moral of This Story is to Never Assume You Have Nothing of Value
I have known people who have discovered many unknown assets. One friend discovered out of the blue that a book he owned for years was actually a very valuable first addition. A friend’s cousin inherited her grandmother’s jewelry. No one else wants the jewelry as they all assumed it was only costume jewelry. They were all surprised that tucked away with that costume jewelry was actually two very valuable rings.
When my grandfather was alive, he ran a truck stop. The items he kept there are now considered “antique”. Though I cannot see anyone wanting an antique icebox, there is a market for those items. For that matter, some very old plates I found at my grandmother’s home turned out to fit into that antique category, as well. Imagine my surprise when I discovered the plates we were eating from were selling on eBay for almost $100 each. Lesson learned: if you own something and are unsure of the value, do your research. You just might be surprised at the amount of valuable assets you own, and most of those can be used as collateral. Speak with your lender to determine acceptable forms of collateral for them.
Benefits of a Secured Loan
We have previously discussed that secured loans can be great for building and improving your credit, but there are a few additional benefits as well. One is that since you are putting up collateral, the lending institution is assuming less risk. This is beneficial because it generally means that the interest rates will be much lower.
Notice I said “generally”. That is because while many loan places do charge lower interest rates for secured loans, that is not always the case. Some actually charge much higher interest, such as title loans and payday loans . If you have never had the misfortune of needing one of these, consider yourself blessed. These are high interest downward spirals that you should avoid as much as possible. There is more detail on these secured loans below.
Other lenders will likely charge lower interest rates, but they will vary from lender to lender. To avoid really high interest rates, simply do research before signing any paperwork. Some other benefits of secured loans are that they are usually easier to get than unsecured loans because it is less of a risk and you can usually get approved for larger amounts.
Risks of a Secured Loan
VIDEO: Title Loan is a Type of Secured Loan
Like all good things, a secured loan has negative sides. First, as there is extra paperwork and assessments needed for the collateral, it may take longer to get approved and receive the funds. Second, as mentioned before, if you are putting cash up for collateral, as in a bank account, a secured loan probably will not be so beneficial for you in regard to bills. Lastly, there is the risk of losing property if you do not pay as you are supposed to. It is best to aim for unsecured loans if those are a possibility for you. If they are not a possibility, be sure that you make timely payments so that you never lose your property.
Terms and Interest Rates
When it comes to the terms and interest rates of secured loans, they can vary as well. Payday loans only give you until your next paycheck to repay the loan. Many payday loans, especially for first time borrowers, do not get approved for much more than $150, though it can go up higher. The highest I have personally seen is $500, but that was after the customer had borrowed money from that lending institution quite a few times. For the $150 payday loan, the interest came to almost $30. For the $500 loan, the interest hit $88. That is about 1/5 of the amount you borrow, which I consider to be a bit high.
Title loans also have high interest raising up into the $100s. However, they have longer repayment terms. In fact, you can literally pay on a payday loan for the rest of your life. The payment the lender requires each month is nothing but the interest, so if you feel like throwing your money away, you can just pay the interest every month. However, that will never touch the principle. If you go in for either a payday loan or title loan, be prepared to make some rather large payments.
On the other hand, there are many other secured loans out there with lower interest rates. In fact, some lenders, such as banks, will also hold your car title as collateral. The difference is the interest rates and the term. With a bank or credit union, the title is literally collateral and the interest on the loan will be about the same as it is for any other loan.
Let’s take an example
For instance, my mother borrowed $2000 from the bank at one point. She used her title as collateral but her payments on that amount came to only $141 per month, and she was to pay for somewhere around two years. This loan was basically a secured personal installment loan for which the interest was added from the beginning. The monthly payments she made were much lower than an actual title loan company charges, and the payment was working on the interest and the principle.
The key to finding a good secured loan comes from doing the necessary research. It is very possible to find a secured loan that offers reasonable interest rates and good payment terms. Often, though, the best ones are not the first ones that jump out at you.
Repaying a Secured Loan
Repaying a secured loan is as important as paying back any other type of loan. Though title loan and payday loan companies do not typically report to credit bureaus, it is not safe to assume that all secured loans are the same. In fact, with most lenders, a secured loan gets reported just as an unsecured loan does. Therefore, you must treat it like any other loan you borrow.
First and foremost, never borrow more than you can repay. Borrowing $1,000 to pay bills will not help if you are adding another bill you cannot afford. My family and I have been in some tight spots over the years. More than once, my immediate inclination was to apply for a loan. The more desperate we were, the more a loan seemed like a good idea. Fortunately, my brain would kick in and say, “If you are already this desperate, how much more desperate do you think you will be when a loan is due next month?” Finding your way out of one problematic situation just to put yourself straight into another one is never a good idea.
So You Absolutely Need a Loan?
If you absolutely need to take out a loan, calculate how much you can afford to repay each month and how long you think you will need to repay it. Be smart about it. Do not take out a short term loan if you cannot afford to pay the full amount back within a month or so, as that is about the length of repayment terms for short term loans. Search for a lender that can provide the monthly payment amounts and repayment terms that you need.
After you have taken the loan out, you should immediately adjust your budget to suit the payments. If you find that you miscalculated and cannot afford the payments, consider picking up some extra shifts at your job, picking up a side job, selling some of your possessions, or anything else you can do to help make the payments.
Also, be sure you as to when you are getting the loan whether there is a penalty for paying it off early. If there is not, consider paying the loan off with your tax refund, a Christmas bonus, or another piece of additional income. The sooner you pay it off the better. Remember that how you treat this loan can and will most likely affect your credit. Do not dig yourself into a deeper hole if you can help it. Be as committed to repaying your loan as you are to make a house payment or car payment.
What Do I Do If I Cannot Repay a Secured Loan?
You took out a loan with every belief that you could pay it back, and you had every intention of doing so. Then, you get blindsided- perhaps you lose your job, an emergency occurs, you get really sick and cannot work for a few weeks, or something else occurs that knocks you down. How will you pay your loan payment? You are already scrambling to pay your rent and buy some groceries. How on earth will you pay that loan payment?
I do not know about you but that scenario sounds awfully familiar to me. Even with the greatest intentions, life can surprise you and take the wind right out of your sails. If this happens to you, start by not panicking. I know that is easier said than done but you cannot think or act rationally if you allow your emotions to control your actions. You can always take a moment to let the emotions roll, of course. You just cannot stay in that place.
Personally, if I am blindsided with something negative, I allow myself to freak out for a day. I usually do not need that long but, in my experience, it is best to let your emotions go crazy for a moment before you try to solve a problem. In my case, within 24 hours or less of my issue, my logical brain kicks back in and suddenly: a.) things do not seem so bad, and b.) a solution seems to pop up out of nowhere.
So if you are facing a crisis, there are a few things I want you to do:
1. Give yourself permission
Especially to freak out- just do not stay in freak out mode for too long.
2. Take a look at your financial situation and assess
Look at how bad it really is. It is usually not as bad as it initially seems.
3. Determine when you can make a payment
Try to find time within a week or two, if at all possible.
4. Call your lender
Burying your head in the sand is not going to solve your problem. Believe me. I have a friend who got a little behind on his loan payment due to a job loss. The lender called continually to see when he could make a payment but he chose not to answer the phone. It was not really that he was ignoring them. He actually had a job interview coming up and wanted to see if he would get hired so he could tell the lender something concrete. Instead, they ended up knocking on his door. From that point forward, he almost could not speak to them anymore about his situation because he had blown their trust in him.
So, again, do not hide. Face it head-on. Call your lender and explain the situation. Also, share your solution with them. If you are having a yard sale over the weekend to make your loan payment, tell them. The more straightforward you are and the more they see you trying, the more likely they are to work with you.
5. After you have given them a date and all the information, do everything in your power to keep your word
Now that you have some 411 on secured loans, you may be asking where to get a loan. As I stated before, there are a lot of secured loan options out there with various requirements, terms, and so on. The best thing you can do is research any personal cash loans available to you to find the pertinent information. If you need the money quickly, refine your research to the term fast loans or quick cash loans. Your research can provide you with the necessary information. However, full disclosure: that research can take a lot of time that you may or may not have.
That is the beauty of Loanry- we have done the research for you. We are connected to a large network of lenders and are dedicated to helping you find a lender that suits your needs. Instead of digging around the internet for hours trying to find a lender, we have provided a platform that makes it easier to get the money you need.
Brandy Woodfolk is an educator, home business owner, project manager, and lifelong learner. After a less than stellar financial upbringing, Brandy dedicated her schooling and independent studies to financial literacy. She quickly became the go-to among family, friends, and acquaintances for everything finance. Her inner circle loves to joke that she is an expert at “budgeting to the penny”. Brandy dedicates a large portion of her time to teaching parents how to succeed financially without sacrificing time with their little ones. She also teaches classes to homeschooled teenagers about finances and other life skills they need to succeed as adults.
Brandy writes about smart money management and wealth building in simple and relatable ways so all who wish to can understand the world of finance.