Secured Lending Agreements
When borrowing money, individuals often seek out secured loans first. That's because secured lending agreements usually come with lower fees and interest rates. The reason is simple: Secured loans come with some form of collateral behind them, anything from a car to a home to vacant land. Lenders have more protection because of this, and do not have to charge the higher interest rates and fees that they levy against unsecured loans.
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Collateral
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Secured lending agreements are based on the theory of collateral. Borrowers are more likely to pay back their loans if they stand to lose something if they don't make their payments. In the case of secured loans, borrowers will lose whatever they put up as collateral--whether that is a car, house, land or boat--if they default on their payments.
Lender Protection
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Lenders have more protection when they pass out secured loans. If their customers default on their loans, the lenders can take whatever possession these customers used as collateral. This is the basis behind housing foreclosures. Lenders take over possession of borrowers' homes when they default on their mortgage loans.
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Types
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Secured lending agreements come in a wide variety of types. One of the most common types of secured loans is the mortgage loan. In this loan, the borrower's home acts as collateral. Car loans are also a form of secured loan; in this case, the borrower's car is the collateral. Lenders can repossess it if the borrower defaults on the loan. Boat, motorcycle and home equity loans are also examples of secured lending agreements.
Lower Rates
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Secured loans traditionally come with lower interest rates than non-secured loans. Again, the reason comes down to lender protection. Lenders charge higher interest rates for loans that aren't secured because there is no collateral and, because of this, less of a financial disincentive to persuade borrowers not to default.
Other Interest Rate Factors
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Other factors impact the interest rates borrowers pay, even on secured loans. Borrowers with low credit scores will pay higher rates, as will those who put less money down on their loans. Interest rates can also vary from lender to lender. Because of this, it makes sense for borrowers to shop around until they find a rate on their secured loans with which they are comfortable.
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References
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