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What Is a Secured Personal Loan?

A man getting a secured personal loan.
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  • Written By: Tricia Ellis-Christensen
  • Edited By: O. Wallace
  • Last Modified Date: 18 October 2014
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Personal loans may come in two forms: unsecured and secured. The unsecured loan is riskier for lenders and depends solely on the hope that borrowers will repay their loan, and the lender’s recourse if a loan is unpaid is often to go to court to demand repayment. Very good to excellent credit ratings are usually required for these loans to make this scenario less likely. The secured personal loan is different because it is backed up by giving the lender rights to some kind of property (collateral), which the lender may seize if the borrower stops making timely payments.

There are many different types of collateral that could be used to create a secured personal loan. These could include loans against property like homes, vehicles or land. Particularly with homes and land, this may be called taking a mortgage out on the property. Other types of collateral might be acceptable in creating such a loan, and might include such things as personal savings accounts that would be held by the lender, stocks or bonds, or luxury items of significant value. Typically value of the collateral is higher than loan value or a significant percentage of the amount loaned.

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Lenders often prefer the secured personal loan because it has built-in protections, and banks or other money-lending associations may be more likely to approve a secured loan than an unsecured one. Some lenders may demand collateral when a person applies for a personal loan, especially if credit score is only moderate and is not excellent. That being said, not all personal loans are fully secured by collateral because value of property like land, homes, vehicles, stocks and bonds, and even luxury items can fluctuate and sink below the value of the loan.

Advantage to the borrowers also exists with this form of loan. Secured personal loan interest rates may be lower, due to the reduced risk the lender is taking. Especially when a personal loan is taken out against something like a cash balance in a savings account or a home, interest rate levels may be extremely competitive and some of the best. Particularly in the scenario where a person mortgages property, interest rates are likely to be very good.

Yet even with collateral, very poor credit may cause people to be turned down for a secured personal loan. People may still qualify for bad credit loans, but they pay high interest rates to obtain these. Another type of short term personal loan is available through pawnbrokers. People can “sell” property for money and have a certain period of time to redeem the property at a higher rate. The fees charged are typically expensive, but pawning could be called a type of secured personal loan, since money is initially lent against the value of an item.

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anon116284
Post 6

In March of 2001, I was sued over a unpaid unsecured bank loan. The bank received judgment against me and just today in Oct 2010, I was served papers that said if I don't pay the amount (which was 2,000 and now is 5,000) in 90 days to avoid seizure of my property. If it was unsecured, can they make me sell my home?

sneakers41
Post 5

Suntan12- I will answer that question for you. The way most people get a bad credit personal loan is by providing substantial collateral that is similar to the value of the loan.

If the person with bad credit tries to get a credit card with the bank most likely the bank will only offer them a secured credit card with a low credit limit that is tied to an account that is fully funded.

Most banks will not offer this type of borrower an non secured personal loan or credit card because this type of loan does not have to be repaid if the borrower can not meet their obligations.

For example, if someone with bad credit goes into a bank and wants a credit card, the bank will offer a secured credit card with a credit limit of just $500. In addition, the bank will require the borrower to fund an account with $500 that will be frozen. This guarantees the credit payment for the borrower. In most cases this is how someone with bad credit can begin to restore their credit and possibly obtain a loan in the future.

suntan12
Post 4

SurfNturf- What do you do if you have bad credit? How do you get a secured personal loan with bad credit?

surfNturf
Post 3

Icecream17- I can answer that. A recourse loan means that if the borrower fails to repay the loan the bank can seek legal action against the borrower in order to receive payments.

For example, in the case of the home equity loan, which is commonly called a second mortgage; if a borrower loses his home due to foreclosure the bank can still seek legal action against the homeowner to pay the remainder of the home-equity loan.

This is why home equity loans and home equity lines of credit can be risky for the borrower.

icecream17
Post 2

Moldova- What is a recourse loan?

Moldova
Post 1

Most of the time secured personal bank loans are the home-equity loans or home equity lines of credit. These are loans that are made against the equity of the home.

These loans are relatively safe for banks because the banks are allowed to place a lien on the property until the loan is repaid. In addition, this type of secured loan is also a recourse loan.

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