What is a Secured Loan?

A secured loan is a loan of money that requires the borrower to offer some form of collateral to the financial institution. Collateral to secure the loan may be any type of vehicle, a home, stocks, or anything of value that the financial institution is willing to accept.

Types

Financial institutions may offer secured loans with fixed or adjustable interest rates depending on the type of collateral. For example, cars typically have fixed rates while home equity and vacant land loans are more likely to have variable interest rates. Loans with fixed interest rates have an equal number of payments that are all the same amount. Variable interest rates may go up or down when interest rates change. The initial lower interest rates seems attractive at first, however some borrowers struggle to make rising payments when interest rates increase.

Time Frame

The length of time on a secured loan may range from 12 months to 30 years depending on the collateral, buyer preference and bank policies. Borrowers typically have options on cars from 36 to 72 months. Whereas home equity lines and vacant land may have much longer terms, even up to 30 years.

Size

Financial institutions have maximum limits that they will loan based on a percentage of the collateral value as well as the type of collateral. For example, they may loan up to 90-percent of a home's value, unless it is a jumbo loan. Jumbo loans on homes over $240,000 may have an 85-percent threshold. Vacant land secured loans may have a 70-percent maximum loan limit. This means that the financial institution will loan 70-percent of the appraised value on vacant land and the borrower will need to have the balance of the purchase price in cash. Some financial institutions offer 100-percent financing on new cars with a $100,000 cap.

Considerations

Secured loans typically have a variety of repayment options. These options may include automatic monthly withdrawals from a bank account, coupon books, Internet payments, or monthly statements. Automobile dealers usually take care of locating financing for their customers. Other easy application methods include applications over the Internet, over the phone, or handwritten applications. Making payments on time for the entire loan will help to improve an individual's credit rating.

Warning

Secured loans may result in the loss of a considerable amount of money if the borrower defaults. The financial institution can repossess the item securing the loan if the borrower does not comply with the loan terms, regardless of the number of payments or improvements made. Only loans secured by a home of residence are currently income tax-deductible.

Resources

• Bank Rates
• What Are Personal Loans
• Money Central Personal Loan Rates