Any loan guaranteed by collateral is a secured loan. Lenders consider them less risky because collateral can be seized and sold to satisfy the loan if you default on the agreed to terms and conditions. This additional security often translates into lower interest rates, higher borrowing limits and longer repayment terms than for unsecured loans.
The type and value of the collateral required depends on the type of loan and on the lenders requirements. Lenders generally prefer assets that are easy and inexpensive to sell. For a physical asset, the lender will consider its fair market value, not what you paid for the item. This is why appraisals and loan-to-value ratio calculations commonly are required with secured loans. The lender uses these to make sure the amount of the loan aligns with the value of the collateral.
Hard Asset Loans
With some secured loans, the item you’re purchasing becomes the collateral. Real estate, home equity and auto loans are common examples of hard asset secured loans. The lender secures the loan by placing a lien on the property or car and by adding their name to the deed or title. In some states, the lender holds the deed or title until you pay the outstanding balance.
With a secured cash loan, the lender’s policies determine what you can use as collateral. Some may accept only traditional forms of collateral, such as your home, car or cash assets. Others may accept items -- or a combination of items -- such as art, jewelry or a coin or stamp collection as long as its fair market value meets the lender’s requirements.
Cash-secured loans are common for people trying to build or repair their credit profile. These are usually dollar-for-dollar loans, where the amount you can borrow is limited to money you have in a savings account for Certificate of Deposit. The lender eliminates any risk by freezing the account until you repay the loan.
Pawnshops and Payday Lenders
Pawnshops and payday lenders offer no credit-check secured loans.
With a pawnshop loan, the broker determines the item’s value, which according to Bankrate is often a fraction of its actual fair market value. The broker keeps the item as repayment security for about 1 to 4 months. If you don’t return within this time to pay the loan, the pawnshop keeps your property.
State laws determine whether payday loans are an option in your location. With most payday loans, you give the company a post-dated check or access to your checking account in exchange for a cash loan. Some companies offer auto title loans in which you pledge a clear -- paid off -- title as collateral. If you don’t pay the loan, the company can seize your vehicle.