A secured personal loan is a personal loan that requires the borrower to provide collateral to the lender. The collateral “secures” the loan because the lender can keep the collateral if the borrower is unable to pay back the loan. So there’s a lot less risk of the lender losing money than with an unsecured personal loan, which doesn’t require collateral.
The major benefit of a secured personal loan is how easy it is to get. A secured personal loan can often get you lower interest rates than you’d receive with an unsecured personal loan, as well. The downside is that you’re putting something valuable on the line. If you secure a loan with your car, for instance, defaulting on the loan would mean losing your means of transportation as well. It’s important to be aware of exactly how secured personal loans work before applying.
What is a secured personal loan? Fast facts:
A secured personal loan is a personal loan that requires collateral.
The lender can take possession of the collateral if you default.
The collateral usually needs to be at least as valuable as the amount you borrow. Some lenders might offer partially secured loans, where the collateral is worth less.
If you’re unable to pay back the loan, the lender will use the collateral to recoup amounts owed. Any excess amount will be returned to you.
It’s not difficult to get a secured personal loan with bad credit because the lender has low risk.
If you have good or excellent credit, you’re probably better off getting an unsecured personal loan. If you have bad-to-fair credit, you may still qualify for some unsecured loans, though your interest rates will be high. You’ll have to weigh those rates against the cost of putting down collateral for a lower APR.
Secured loans require you to surrender something of value to the lending institution as the collateral until the loan has been repaid. The collateral can be your car, your home, or other valuable personal property. If you are unable to repay the money, the lender will have the right to take possession of the collateral and sell it to recover their loss. … read full answer
Unsecured loans do not require any collateral. So if you cannot repay the loan, the lender will not have any collateral to take possession of.
Because unsecured loans are riskier to lenders, often, it is harder for you to obtain an unsecured loan. Also, often the interest rate on unsecured loans is higher than with secured loans to compensate for the risk that the lender takes on.
Personal loans let you borrow a sum of money from a lender and then pay it back in monthly installments over a set term – usually anywhere from 12 to 84 months. Those monthly payments include equal portions of the original loan amount, plus interest and fees. Personal loans can be used for debt consolidation, home improvements, vacations, big purchases and more. Understanding how things will go, from the time you apply to when you submit your final payment, is the key to making personal loans work for you.… read full answer
How Personal Loans Work
Lenders Review Applications.
You will need to provide personal information (such as your address and SSN), financial information (such as your income and employment status) and more. The lender will evaluate and hopefully approve you.
Applicants Receive Funds After Approval.
The issuer of the loan will deposit the money into your bank account as a lump sum. You can do whatever you wish with the money, unless the terms of the loan say otherwise.
Interest Charges Accrue.
From the day you take out the loan, the amount will begin accruing interest at a rate set by the issuer. So no matter how long it takes you to pay the loan back, you’ll always owe more than you originally took out.
Borrowers Make Monthly Payments.
The lender will give you a required amount to pay each month. You can pay more if you’d like, but make sure that there’s no penalty for paying the loan off earlier than the terms of the contract stipulate. Some lenders may charge a fee.
Loan Payments Build Credit.
The lender will report to the credit bureaus whether you’ve paid on time each month. Once you’ve paid off the entire balance, including interest and fees, the lender will report your loan as paid in full. Abiding by the terms of your loan can help increase your credit score.
Personal loans are pretty simple. You just have to make sure to submit your payments every month, and setting up automatic monthly payments from a bank account can go a long way in that regard. The most complicated part of the process is probably selecting the correct loan, but WalletHub’s comparison tool makes that easy.
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