Credit is important. We all know this by now, so we’re constantly looking for ways to improve our score. If you find yourself in a less than desirable situation, there might be a solution for you; enter the secured loan.
In this article, we’re going to explore what a secured loan is, what types exist, how it one can help, and what to be wary of.
Let’s go.
What’s a secured loan?
A type of lending, whether it’s a traditional loan set up or a credit card, where you put up collateral. Collateral is an asset that you own, which could include, but isn’t limited to your home, car, artwork, jewelry, stock, and money.
There are several different types of secured loans. Let’s look at a few of them.
Types of secured loans
- Mortgages – When you purchase a home (unless you pay for it with cash) you take out a mortgage and agree to pay back that loan over a period of time. In this instance, the home you purchase is collateral. If you fail to make good on your promise, the lending institution can take ownership of your home and sell it in order to pay off your loan.
- Car loans – Exact same set up as a mortgage, although on a much smaller scale. If you take out a loan to buy a vehicle, you’re promising to pay the loan back over a period of time. In this case, the car is your collateral. If you fail to make payments, the lender will take possession of your car and sell it in order to pay off your car loan.
- Secured credit cards – A secured credit card is my general recommendation for someone that has bad credit and wants to rebuild it. With a secured credit card, you have to put down money in the form of a deposit. That deposit effectively functions as your credit limit. If you put down $1,000, then your credit limit is $1,000. If you don’t make payments on what you borrowed, the lender will take your deposit and pay off your card.
- Title loans – If you own an asset outright (specifically, your home or your car), you can take out a title loan. The owned asset acts as your collateral. If you don’t make payments on the loan, the lender will take possession of your asset and sell it to pay off your loan.
- Other secured loans – Anything that you can put up as collateral gives you the ability to take out a secured loan. Artwork, jewelry, stocks, etc. all fit that profile.
How it can help
Unsecured loans, like personal loans or standard credit cards, like to see good credit scores. If you don’t have a good score, a secured loan could help you build yours back up.
I’d like you to refer back to the secured credit card section. The lender is out, literally, nothing by giving you a secured credit card. You put the money down. If you don’t make the payments, they’ll take the card back and keep your deposit to pay off the outstanding balance.
The most important point to be made here, however, is when you’re building your credit score, you HAVE to make payments on time. This is the number 1 factor considered when calculating your credit score.
Things to watch out for
The biggest concern with a secured loan is the lender has the ability to take ownership of your asset if you’re not making the payments.
When you’re borrowing money, whether it’s secured or not, you have to make sure you’re making your payments on time. Another thing, don’t borrow more than you need to and stay within your means.
Related reading:
Strategies for Improving Your Credit Score
How to Pay Off Credit Card Debt
What Affects Your Credit Score
Jacob Sensible is a financial advisor with decades of experience in the financial planning industry. His journey into finance began out of necessity, stepping up to support his grandfather during a health crisis. This period not only grounded him in the essentials of stock analysis, investment strategies, and the critical roles of insurance and trusts in asset preservation but also instilled a comprehensive understanding of financial markets and wealth management. Jacob can be reached at: jake.sensiba@mygfpartner.com.
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