Secured Loans

Secured loans are loans backed by collateral such a home, an automobile, or property. They carry low interest rates because the risk to the creditor is relatively small. If the debtor defaults on the loan, the creditor can seize the collateral to sell and recoup its losses. People with low credit scores who might not otherwise have been approved for unsecured loans are often approved for secured loans. Still, people should not take out secured loans impulsively. Anyone considering secured personal loans should follow a few basic tips.

Ensure the Loan Is Necessary

Don't take out secured loans unless you're absolutely sure you need them. Remember, if your home, car, or property is your collateral on secured loans, you could lose your home, car, or property should you default. An unsecured loan may be more difficult to qualify for and may have a higher interest rate, but it is less likely to risk your property should you default.

Confirm the Loan Is Affordable

Make sure you're not living paycheck to paycheck to make the monthly payment on secured loans. You may be able to afford a $1000 monthly payment right now, but consider what would happen if you lose your job. It's better to get a secured personal loan that leaves you with some leftover earnings to put into savings for a rainy day, even if it takes you longer to pay off the loan.

Weigh Multiple Offers

You may be seeking out a loan, but because you have collateral, you're in a position to negotiate. Not all homes, automobiles, and property are equal. Get your own appraisal if necessary so that you're in a good position to negotiate. Go to multiple banks and credit unions -- skip the cash stores, which charge higher interest rates and see what they have to offer. Compare all the offers before you make a decision.

Consider All Terms

The best secure loans offers aren't necessarily the secured personal loans with the lowest interest rates. Many secured personal loans that seem appealing on the surface aren't the best deal in the long run. Consider some of the following terms that many people overlook when seeking secured loans:

  • Annual percentage rate (APR) - The APR is a combination of the interest rate and other loan charges and fees. The secured loan with the lowest interest rate might have a greater APR. The APR is a better figure to compare when trying to ascertain the most affordable secured loans.
  • Repayment schedules - Taking out a loan for the same amount from one financial institution may take twice as long to pay back as it will through another--and perhaps you want it that way. Find secured loans that offer monthly payments that you can afford, even if that means you'll have to take longer to pay off the entire loan than you would with a higher monthly payment. However, do the math and add up the interest charges that would accumulate with the longer term repayment schedule secured loans and make sure you're not paying a great deal more in the long run.
  • Prepayment penalty - See if the secured loans you're considering carry prepayment penalties. If you're in a financial position in the future to pay of the entire loan before your scheduled payoff date, some financial institutions may charge you a prepayment penalty fee as high as 8% of the entire loan. Find secured loans without prepayment penalties if possible.

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