Secured Personal Loan Types
Secured personal loans allow you to put up assets as collateral, helping you obtain loans even if you don’t have an excellent credit score. Knowing what you can use as collateral can give you an advantage when searching for the optimal personal loan.
Here are some of the secured personal loan types that you should know.
When obtaining a gold loan, you pledge your gold assets as collateral against the loan. This gold gets appraised. If the loan agreement goes through, you receive funds according to how much your gold is worth and the lender gets to keep the gold as security.
Gold loans are also called gold-backed or gold collateral loans since they are essentially secured personal loans with gold as collateral.
The gold assets can be:
- Gold jewelry
- Gold bars
- Gold coins
The gold ranges from 18 karats to 24 karats, depending on the lender’s requirements and what you can offer.
Advantages of a gold loan
Easy approval: Compared to other kinds of personal loans, it’s typically easier to get approved for a gold loan. Lenders are able to appraise the gold pledged as collateral and grant you funds depending on the valuation. They won’t judge your credit score, history, or any of the usual factors that lenders consider when giving out loans.
Lower interest rates: A gold loan’s interest rate is influenced by the purity of the gold. The higher the purity, the lower the interest rate. Compared to other kinds of personal loans, you may be able to secure a lower interest rate for your goal loan. Because of this, it can also be easier to repay your loan.
Fast disbursement of funds: If you need quick money and have gold assets on hand, your lender may be able to disburse the lump sum loan into your bank account very quickly. Disbursement usually only takes around 2 hours.
Safe collateral: For gold loans, the lender typically stores the gold inside a secured vault, which means you won’t have to worry about the gold getting stolen or damaged.
Disadvantages of a gold loan
Limited loan amount: Since the loan amount will be determined based on the worth of your gold, you can only receive a limited loan amount.
Less suitable for the long term: Gold loans are usually short- or medium-length loans, especially due to their lower loan amounts. If you want a long-term personal loan, it might be advisable to consider a different kind of loan.
When should I take out a gold loan?
A gold loan can be greatly beneficial if you need quick funds and have a poor credit history, since getting approved for a gold loan usually only depends on the quality of your gold.
If you have gold valuables that are essentially collecting dust in a storage space somewhere and need money, you might want to consider obtaining a gold loan.
Loan against securities
A loan against securities means that you pledge shares or mutual funds you own as collateral to take out a loan.
Getting a loan against securities is a way for investors to obtain funds for purposes such as emergencies, vacations, and large purchases.
Loan against securities benefits
Option for investors: For those who have invested plenty into stocks, taking out a loan against securities can be a flexible way to obtain a lump sum of funds.
Good if market conditions are favorable: If markets are currently on the rise, a loan against shares might be an advantageous option to help you meet financial and personal obligations.
Freedom of use: Loans against securities have very few exceptions in terms of what you can use the funds for.
Loan against securities disadvantages
Affected by market volatility: If there is a stark difference between the stock market condition and your loan terms, the lender might perform an assessment and charge you based on the difference. Unlike other kinds of personal loans, loans against stocks are more drastically affected by market conditions.
Better for the short term: If you want a medium- or long-term loan, a loan against securities might not be for you.
A lien will be put on your pledged shares or mutual funds: This essentially means that you won’t be able to take any trade or sell calls until your loan repayment terms have been satisfied. These restrictions may be risky, uncomfortable, or inconvenient depending on your needs and evolving circumstances.
A collateral-based loan is a generic way to refer to secured personal loans. You secure the loan with assets that you put up as collateral. These assets can be practically anything of value. Often, lenders will grant you a loan amount worth half of the collateral valuation.
If you take out a collateral loan but fail to repay it, the loan goes into default. A loan default means that the lender has the right to seize your collateral.
Collateral can be assets such as:
- Cash accounts
- Insurance policies
If your collateral assets get damaged but you haven’t repaid your loan yet, the lender may adjust the loan terms. It is important to not hide any collateral damages or losses from the lender because there could be grave consequences if you do.
Home equity loans
A home equity loan (HEL) allows you to use the equity of your home as collateral for the loan. Equity is how much your property is worth, minus any existing mortgage on that property.
The risk of taking out a home equity loan is that your lender could foreclose on your home if you fail to repay it. Foreclosure entails the forced sale of your property in an effort to recover the outstanding loan balance.
A home equity loan can be a valuable, fast way for you to get approved for a loan if you need the funds. However, there are considerable risks if you end up defaulting on the HEL. Losing your property is a serious consequence.
If you opt for a home equity loan, make sure you review the terms and conditions of the repayment schedule to determine whether you can comfortably make the monthly payments.
Auto title loans
An auto title loan, also called a title loan, lets you use your vehicle title as collateral to take out a personal loan. A title loan is typically a short-term loan, forcing you to repay the loan within 30 days. Depending on your lender, the terms and conditions of your loan may be predatory and challenging to meet.
After you’ve signed an auto title loan agreement, the lender will place a lien on your car title and receive a hard copy of your title. The lender will also give you your loan amount, which is generally half of how much your car is worth.
To be approved for a title loan, you have to own the vehicle free and clear–this means that no one else can have any claim on it.
Car title loan benefits
Fast approval: With an auto title as collateral, it’s relatively easy to obtain a title loan compared to other kinds of loans. Even if you have bad credit, a title loan is available as an option.
Fast funds for emergencies: If you are in urgent need of money and have poor credit, a title loan might be a meaningful way for you to fund an emergency.
Car title loan risks
High interest rates: Many car title loans have high interest rates, making the loan unfavorable for borrowers.
Very short-term solution: An auto title loan typically needs to be repaid within a month. This can make it very difficult to repay properly.
Car may be monitored: Some lenders will take extra safety precautions. For example, they may require you to install a GPS tracker on your car.
Savings secured loans
A savings secured loan allows you to put up money you have in savings as collateral to take out a loan. If you’re looking to obtain funds but have poor credit, a savings secured loan may be a good option for you to consider since a savings secured loan may have no credit check requirements.
In addition, a savings secured loan may be able to help you re-establish credit. While you can’t use the funds in your savings account that gets frozen until you repay the loan, you should still be able to earn dividends on your savings account during this time.
Savings secured loans are sometimes confused with certificate secured loans. Whereas savings secured loans uses funds in your savings account, a certificate secured loan is secured by a certificate of deposit.
A mortgage specifically allows you to put up property as collateral in order to obtain a loan amount that finances real estate. If you default on the loan by failing to meet the repayment terms, the lender has the right to repossess the property and/or foreclose it.
Mortgages can be used for various kinds of real estate, such as a house or land. They are often long-term loans that help people finance or refinance an expensive property, which means that a mortgage term can easily be several decades.
The terms and conditions for a mortgage can vary greatly depending on numerous factors, including:
- Your credit score
- The value of your property
- Location of property
- Size of your down payment
- Term of the loan
- Type of interest rate
- Type of loan (for example, a loan from the Department of Veterans Affairs (VA) will have lower interest rates)
Loan against insurance policies
A loan against life insurance policies allows you to make a cash value withdrawal, which can then be used as collateral for a loan from your insurer. This kind of loan is also known as a life insurance loan.
There are numerous advantages and disadvantages to taking out a life insurance loan, which is why it is important to carefully consider the terms before you obtain one.
Life insurance loan benefits
Access to immediate cash funds: The cash funds may benefit you and/or your family more right now.
No need to repay while alive: A life insurance loan doesn’t need to be repaid before death.
Tax benefits: As long as your loan funds are less than or equal to the amount of life insurance premiums paid, the loan funds will not be taxable.
Life insurance loan disadvantages
Outstanding debt reduces the death benefit: Even though the loan doesn’t need to be repaid before you die, having an outstanding insurance loan debt can reduce the death benefit amount.
Requires accumulated cash value: You need to have cash value before you become eligible for a life insurance policy loan.
Inflexible loan repayment terms: Life insurance repayment terms and conditions are typically more limited.
Risk of life insurance policy termination: If the insurance policy becomes too unfavorable for the insurance company, the policy may be terminated.
Loan against fixed deposits
A loan against fixed deposits (FD) lets you pledge your FD as collateral to obtain a loan. The loan amount can be up to 95% of the deposit amount. An FD is a kind of bank account that have higher interest rates than regular savings accounts, at least until a given maturity date. Investors who have fixed deposits may wish to take out a loan against FD.
Note that there are several restrictions that can keep you from making a loan against FD. For example, a loan against FD that is in the name of a minor is not allowed.
Other collateral types
When choosing to put up assets as collateral, here are some less common kinds of assets people have used:
- Trading cards (NBA, Pokémon, etc.)
- Fine wine
- Rare coins
- Beauty products
If you are opting for an atypical collateral type, your lender may need to perform additional appraisals to determine the worth of your assets.
Remember to try and shop around different lenders to see which one can provide you with the most favorable terms and conditions. Since your collateral may be taken away by your lender if you fail to meet the repayment conditions, it is essential to pick a secured personal loan that suits your needs and matches your budget well.
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