Secured personal loans are a type of loan that a person will take out – from a bank, credit union, other financial institution, or even an individual – and agree to pay it back over a specific time-frame and often at a fixed interest rate. Though these kinds of loans are “secured” with some sort of collateral – like a checking or savings account, for instance – they are a great way for someone to quickly establish credit history. Here’s the main benefits of these types of transactions.
- Secured personal loans may be faster to get. Even for people with bad credit, secured personal loans are often regarded by lenders as being low risk because the borrower has to put up collateral to guarantee repayment. As such, many banks don’t hesitate in approving requests for these kinds of loans. This means the application process is simpler, and you receive the loan faster than you would if someone refinanced a mortgage, for instance.
- Borrowers can use them for whatever is desired. Unlike a mortgage, car loan, or a student loan, this kind of loan doesn’t carry restrictions as to what it can be used for. In other words, if a borrower needs a loan to cover expenses while searching for a job, buying gifts, or even taking a dream vacation, this may be a perfect fit.
- Secured loans taken out against a home mortgage in the form of a line of credit will give a borrow access to larger sums of money (again, with no restrictions on use), often at a much lower interest rate.
- For many borrowers, personal loans may result in the money being available much faster than for other types of loans. As an example, a secured credit card – a type of secured personal loan – may even take weeks to arrive before the borrower can start using it.
- If the borrower has concerns about the monthly loan amount, secured personal loans can often be spread out over a longer period of time, thereby resulting in a lower monthly payment.
- Some kinds of loans that are secured like a mortgage-based line of credit, may offer certain tax advantages. Consult with a bank or tax professional about the possibility of writing off interest from a secured personal loan when income taxes are filed.
Types of Collateral Used
Secured personal loans taken out through a bank or credit union are different than if borrowed from a friend or family member. Why? Because these kinds of loans use collateral as a means of securing the loan against default. Every financial institution has different policies, but secured loans are normally approved based on a certificate account, a savings account, or even personal stocks or other assets. In other words, if the borrower defaults on the loan, the payback amount is deducted from all assets put up as collateral.
Getting a personal loan is a great way for certain borrowers to re-establish credit history, giving them a chance to demonstrate their credit worthiness and reliability to a bank or credit union. In the long run, this gives access to other loans at much lower interest rates.