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How Do Secured Personal Loans Work?

  • October 22, 2021

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Getting a loan can be stressful, especially if you don’t understand what the terms mean and how the loan works. You shouldn’t get yourself into a financial situation that you don’t understand, as you could end up agreeing to something you cannot afford.

To help you understand secured personal loans, we have made this little guide. 

What Is A Personal Loan?

A personal loan is an agreement with a lender, where they give you money and expect you to pay it back with an additional fee on top. Being “personal” means that you’re expected to need this money as a flexible option as opposed to using the loan to pay off one big project. For example, you might have to pay for a wedding and need to pay for different services. The flexible nature of the loan allows you to dip into the fund as often as you like.

In comparison, other loans may charge you every time you take money.

Because of their flexible nature, personal loans can be expensive, but that's the price you pay for low restriction additional money. 

Related to How Do Secured Personal Loans Work? - 

What Is A Secured Loan?

A secured loan is often used to help you buy a home. When you talk to a lender, they will ask you to put up an item (or items) of the same value against the loan. If you fail to pay the loan back, the lender is allowed to claim the item (or items) as collateral.

The lender then sells your item (or items) and gets their money back.

You are essentially telling the lender that you can afford to pay the loan back either way, but your money is locked in physical or intellectual property. 

Debt consolidation loans by allow you to put all your personal loans into one place to make repayments easier. You may want to change from an unsecured to a secured loan to get a lower rate, thereby making your overall debt less. This is one way in which you may want to use a secured loan. 

What Is The Difference Between A Secured and Unsecured Personal Loan?

Most personal loans are not secured; instead, they are considered unsecured loans. This means that the lender has to take a bigger risk when agreeing to let you borrow money. Because you are a bigger risk, your additional fees will be more. 

Most personal loans are unsecured, the most common are credit cards, medical debts, and student loans. 

Qualifying for an unsecured loan is harder than a secured one, as you have no proof that you can pay the lender back. If you do manage to gain an unsecured loan, you will not be able to borrow as much as a secured loan could have offered you. 

You might think that this is still the safer bet, as you won’t lose your house if you cannot pay, but that isn’t true. Instead, the lender can take you to court (costing you both a lot of money), and the judge will decide how to pay the lender back. This could mean automatically taking a large chunk of your wages, selling your home, or another way that is more personalized to you.

The main difference between secured loans and unsecured loans are their rates, their borrowing amounts, their need for collateral, and the ease of application.

Secured loans need a collateral item, they are easy to qualify for, they have low rates, and they can offer you high amounts. This is all because you can prove you can pay the money back with your collateral item.

Unsecured loans don’t need a collateral item, they are hard to qualify for, they have higher rates, and they offer lower amounts. This is because, without an item, you are a risk. Some people have no valuable items to prove themselves with, which is why they need to opt for unsecured loans. 

How Do Secured Personal Loans Work? 

Like with most loans, when you talk to the lender, you will agree on a monthly repayment strategy to pay back what you owe. This strategy will also include a time that you’ll need to start making repayments and the amount of interest you need to pay.

The time you need to repay will be judged based on the lender’s standard terms and your personal needs. If you need this loan to pay the bills while you are waiting for your new job to start in 2 months, then you can tell your lender this, and they will likely agree to set the start date at the same time as your new job. 

When it comes to interest, every lender is different. They might offer you an upfront cost and add it to your overall borrowing amount, so you end up with a fixed loan that will not change unless you pay towards it, lowering the balance. Or they could offer you a monthly interest increase which changes with the economy. This means you won’t know how much you will pay in total by the end of the loan, but you can reduce the interest by paying off large chunks. 

Regardless of which method they use, your home (or whichever collateral item you have chosen) will not be at risk as long as you pay your monthly repayments on time. 

What Happens If I Default On My Secured Personal Loan

Defaulting in finance is when you fail to meet the legal obligations agreed to. Usually, this means not paying the minimum amount on your monthly loan, not paying on time, or both. 

If you default on a secured loan, the lender has the legal right to take possession of your collateral item. However, they are unlikely to do this until you have proven to be uncooperative.

This is because they will have to hire a bailiff to take the item and discuss with lawyers how to gain legal ownership. This transaction isn’t instantaneous, and it is expensive. So most lenders will try to talk to you about your situation and see if you can agree to a new system. This could mean a lower monthly payment resulting in a longer debt, or a break in payments until you can pay again. 

Because you have broken your contract, the lender doesn’t have to be lenient with you. They might not give you these options at all. This is why you should tell your lender about your situation as soon as you realize the problem. This open communication tells them you are worth the leniency, and they will try to help you as you find your feet. 

Regardless of the conversion you have with your lender, defaults will show up on your credit report, and they will affect your ability to take out credit with other lenders. 

Can I Pay Off A Secured Personal Loan Early? 

Normally when you agree to a loan, the time it takes you to pay back the money will allow the lender to add on interest charges. This means it is in the lender's best interest to put you on a long term or long contract. 

You may find that you have the money to pay back your lender earlier than expected, but depending on how early you hope to close the loan, this could result in an early repayment fee. This fee might be the cost of 1 to 3 months’ worth of interest or might be a set figure included in your loan agreement.

Before you try to pay off the loan early, you should talk to your lender about how much the fee will be and decide if the early closure is worth the additional payment.