How to Manage a Secured Loan
Secured loans use assets, or collateral, to back their value. These loans can be more advantageous than unsecured loans, such as most credit cards, because they often offer a lower rate and better terms. Secured loans also are easier to qualify for if you have a less-than-stellar credit rating. However, secured loans still require diligent management. If you default on your loan, you can lose your home, your car, your boat or whatever else you used to back the loan.
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Things You'll Need
- Car title (for auto loans)
- Mortgage loan statement (for home-equity loans)
Instructions
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Determine if you can afford the loan. Get a loan pre-approval from your financial institution, either in person or online, and plug the potential payments into your monthly budget. Download a budget worksheet if you need help.
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Apply for your loan. Your lender will want proof of your collateral before granting you the loan, so bring in your car title, vessel title or most recent mortgage statement if you're using one of these assets. (Remember that you can only borrow against the difference between your home's value and your outstanding mortgage balance.) Alternately, if you plan to use cash as collateral, put it in a savings account or certificate at the bank where you wish to borrow.
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Set up automatic payments. This will ensure that you make your payments on time each month, and will diminish your risk of losing your asset. The easiest way is to sign up for automatic debits from your checking or savings account. If you have one of these accounts at the same institution as your loan, ask a representative to do this for you when you sign for your loan. If not, instruct your savings institution to send an ACH transfer on the same date each month (at least 2 to 3 days before your payment is due) and provide the name and account number of your loan. Ask If the institution has an automatic bill-pay service so you can manage future changes over the Web.
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Tips & Warnings
Using cash to secure your loan minimizes your risk and allows you to keep funds on hand in case of emergencies.
Interest on a home-secured loan may be tax-deductible. Ask your tax adviser for details.
Many home-equity loans require appraisal fees and other closing costs. This information should be included on the loan application.
Just because you can get a secured loan doesn't mean you should. Think about whether the purchase you're planning is really worth the risk of default.
Read the terms of your contract carefully before you sign.
Never take out a secured loan through a payday lender, such as those oft-advertised "quick car-title loans."
