Saturday, 6 July 2019

What is a secured loan?

Secured Loan - What Is it?

We're going to be talking about something called a secured loan or kind of answering the question of what is a secured loan because it's one of the weirder types of loans in my opinion. It can do good for people but it also doesn't make sense for everyone to do and I find it unnecessary many times but that's what we're going to talk about today.

What is a secured loan?

  • You would never go to a bank and say, hey I want to apply for a secured loan with the expectation of them understanding this could be for a car, a house or a boat, whatever it may be.

A secured loan is an installment type of loan where your money acts as collateral for the bank. Just like your car is collateral for a car loan, if you get a mortgage your house as collateral for the mortgage loan. In this case, your money is collateral for the actual secured loan.

Just like if you didn't pay for your car loan they're going to come take away your car, if you don't pay for your house then your houses get foreclosed on, If you don't pay on a secured loan well then they will take that money away. That is why it is a secured loan

Let me explain

Let's say you wanted to do a secured loan for like $500, that means that you would need to keep $500 in your savings account. They would lock that money up because that's how much money you want a secured loan for. And what you would repay back to the bank is that $500 plus a little bit of interest as well.

If someone decides to do that secured loan for $500, as they make payments on their loan, that held amount and their saving actually goes down. Let's say you did that $500 and you've paid off $100 toward the loan amount is only $400

Now the amount that they keep locked up in your savings account should only be $400. Over time as you pay down the loan they're going to release some of that locked up money. To the point where at the very end when done paying off that $500 loan, your $500 is still there sitting in your saving account like nothing ever happened to it.

I hope it clear to you.

Now that you know what a secured loan is

Let's look at some of the other questions that you probably have about these secured loans because honestly, they are a uniques type of loan that's not meant for everybody.

Question 1: What do Interest Rate on Secured Loans Typically Look Like

Honestly, they're actually low, every financial institution is going to be different so I can't say it's always this rate. typically somewhere around like 2% to 4%

Question 2: Why is such a low rate

Think about it, if you had to do a loan where you had to keep whatever the loan amount was, you had to keep that same dollar amount in your saving account locked up and you never ever made a payment on it.

What do you think would happen to that money in your savings account. Well, they will probably just take it. If you never make a payment on it they're just going to take the money out of that locked up funds in your savings 

Therefore it's just a very low-risk loan and because of that, it's normally really low-interest rate as well.

Question 3: How Long is the Typical Secured Loan Finance For.

This question just like the same first doesn't have an exact answer, because you can really do a secured loan amount for anything as long as you've got the money for it, you can do a secured loan probably for however much you want

But if you do a $500 loan maybe that loan is going to be financed for like six months or a year at the longest, whereas if you do a $10,000 loan that secured loan may take like 3 years to pay it off

There's no real exact term length limit, you get to choose what you want pretty much based on the dollar amounts of the loan.

Question 4. Can Anybody Get a Secured Loan

Here's another really great benefit to secured loans and that is almost anyone can get approved for this loan. And again like I said earlier your money acts as collateral and it's very low risk for banks to do those type of loans, what is the point in them denying anybody

When there's that little risk involved and they have pretty much they're guaranteed just sitting there locked up, there's no real reason for them to deny you.

It does not matter what your credit score is, doesn't matter what your credit history looks like typically if you've got the money you can get approved for a secured loan.

Question 5: Why Would I Ever Want to do a Secured Loan

Before I answer, really think about this, if you ever in a situation where you have money to pay for something, why would you ever want to lock your own money up and do a loan against it?

3% is pretty low-interest rate but it's not as low as zero, why to pay interest if you don't have to, it just doesn't make any sense so why would you ever want to do that.

  • The answer is really simple in my opinion, you should only do a secured loan if you want to build credit.

It's very low-interest rate and anybody can almost get approved for these loans, so if you're looking to build up a credit history, the last thing that you want to do is to apply and then find out that you're denied, that doesn't do you any good.

Likewise, you don't want to build credit by doing like car loans, or through personal loans, or get into like debt to build credit, or paying high-interest rate to build credit

A nice in-between really is a secured loan, let's say that you actually did a $500 loan for one year, the payments on that work out to be $42.35 a month and after that full year, if you use the banks' money that $500 that they gave to you to actually make the payments on the loan, you really only ended up paying $8.20 to build up credit.

For those that do want to build credit, this is one of the cheapest ways I know of getting that done. I would still advocate that a credit card does a better job but sometimes you want to have revolving loan history and you want to have installment loan history.

  • Revolving Loans: Are thing like lines of credit and credit cards
  • Installment Loans: Are things like cars, personal loans, houses, and secured loans.

I think building up credit is the only reason. Why you should ever do a secured loan.

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