A secured loan is money you borrow against an asset as security. Unlike unsecured loans, the interest rates on a secured loan are lower. Compared to other kinds of loans, this option can be riskier, so it is important that you understand how it works, and know what you’re getting yourself into when you apply for one.
In order for you not to get in over your head, learn what would happen in case you are unable to make payments to ensure you don’t get into trouble after securing the loan. To get started with a secured loan, here are some of the basics you should look at.
One of the things you should look at while applying for a secured loan is the interest rate. Some loans come with a higher rate than others and this may mean different amounts repaid. Mostly, the interest rate placed upon secured loans is variable, so it can fluctuate over time depending on a number of factors including inflation, base rate, and so on.
While pursuing information to understand secured loans how they work, you should lay emphasis on the interest part to know the maximum you can be charged after acquiring the loan. This will save you the frustrations of fluctuations of interest with time as some loans come with hidden terms that might haunt you during repayment.
Since the loan is secured by an asset or property you own, its amount is limited by the value of the asset or property. Say you have a home valued at $120,000, the lender can decide to give you about $100,000 (see loan-to-value ratio explained below). Note that if your home is under a mortgage, its equity is calculated by subtracting the amount owed on the mortgage from the retail price of the property. This means a home that still owes mortgage might not fetch a big amount from the lender.
There is something referred to as loan-to-value (LTV) ratio that lenders use to determine the amount to give you. When the LTV is 85%, it means the lender will only award you 85% of the value of the asset securing the loan. This valuation is arrived at based on a number of factors including your credit history. So, it’s likely you will not get an amount equivalent to the value of your home.
As a consumer, you should also be aware of the terms of the loan. This is important as it helps you to do a comparison while shopping for cheaper credit. Basically, the loan terms spell out how you will make payments and the kind of penalties you should expect in case of default or late payment. This information is important as some people end up losing their property for failure to observe the terms that come with the loan. In most cases, you are given a warning about your lateness or failure to clear your loan, after which the lender can proceed to repossess the asset used to secure the loan.
Before you apply for a secured loan, you need to understand how it works. Usually, this is a loan that is backed by an asset or property, which means in case you fail to repay the loan the asset is repossessed by the lender. You should also review the loan terms to ensure you are getting into something you can manage comfortably.