Definition of a Secured Loan
This is a financial product in which collateral is pledged by the borrower. The collateral is an asset such as a property or a car. With the collateral in place, the debt becomes secured.
How Does Secured Loan Work?
A secured loan involves the pledging of assets that serve as collateral in securing the loan. When a secured loan is taken, the lender is given the right over the asset, to claim it as payment when the loan has defaulted. If the borrower defaults, the lender takes possession of the collateral which can be resold to some or the entire amount borrowed.
A secured loan relieves the lender of a large part of the financial risk involved in the transaction as a property is collected in case the borrower defaults repayment. The claim to the asset or property is known as a lien. Till the repayment of the loan is complete, the lien stays in place. It is returned to the borrower when the loan is paid and if the loan isn't paid, the lender seizes the collateral. The point of seizure of the collateral depends on the contract of the loan, the secured loan type, and the state's law. Sometimes, lenders act to seize the collateral as soon as the payment defaults.
How to Obtain a Secured Loan for My Business?
To obtain a secured loan, something of value is needed to pledge as collateral. Assets such as certificates of deposit, valuable properties like a paid-off vehicle, real estate properties, jewelry and saving accounts' finances.
There are several things to consider when obtaining a secured loan. Apart from comparing the term of the loan from different lenders, other factors that should be considered are:
This involves d amount of interest paid on the loan received. Some secured loans have lower interest rates as the home equity loans, while others that are offered to borrowers with bad or low credit score have higher interest rates.
This is the duration at which the loan will be repaid. A longer repayment term usually involves a lower monthly payment as the payment is spread across a long period. For shorter repayment term, the monthly payments are usually high but the interests are lesser over-time as the debt is paid more quickly.
The collateral required for a loan varies between lenders. As some require a savings account fund, others might prefer a paid-off vehicle.
The amount of the loan needed will determine the source of the loan.
Another factor to be considered when taking a secured loan is the duration taken to receive the borrowed funds. This will affect the choice of lender.
Advantages and Disadvantage of Secured Loan
- The presence of collateral results to lower interest rates. Also, there is a lesser focus on the debt to income ratio and credit ratings of the borrower.
- It offers greater flexibility as greater amounts can be borrowed and repaid over a long period of time.
- Processing a secured loan usually takes longer time as asset valuation and other legal checks must take place.
- It poses a higher risk to the borrower whose collateral is on the line.
What Are the Types of Secured Loan?
There are several types of secured loans. They include:
- Equipment Loan
- Inventory Loan
- Merchant Cash Advance (MCA)
- Invoice Financing
- SBA Loans
- Term Loan
- Business Line of Credit
This form of secured loan provides the borrower with a line of credit that typically equals the deposited fund's value with the lender. In this case, the deposited funds serve as collateral.