Home Loan What Happens When A Loan Is Backed By Collateral?

What Happens When A Loan Is Backed By Collateral?

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Secured Loan

There are two Types of Loans one, Secured Loan and other is Unsecured Loan. Many of us might have heard about Secured Loans but never really understood them. So here is a complete understanding of Secured Loans.

Secured Loans

These loans are protected by an asset in other words called collaterals. The item purchased be it a home or a car can be used as collateral. The lender will retain the deed or title of the collateral until the loan is cleared in full. There are other items that are also used as loan collateral. Like:

  • Stocks
  • Automobiles
  • Bonds
  • Machinery and equipment
  • Valuables and collectibles
  • Precious Metals Like Gold and
  • Personal Property.

These loans are the most used method in the industry to borrow large amounts of money. A lender lends large sums of money only if he/she is satisfied with its repayment in full. Putting one’s home as collateral ensures that you will do all within your limits to repay the loan i.e. not default the loan willingly.

Loans that are backed by collaterals are not procured just for new purchases. They can also be home equity loans or home equity lines of credit. These are calculated based on the current value of your home minus the owed amount. These loans use your property like home and other items mentioned above as collateral for the backing.

A secured loan means that you are giving the lender an assurance that you will not default on a loan. In case, you default the loan the lender will sell out your collaterals to claim his / her dues from your side.

Loans that are backed by collaterals have some significant advantages over the loans that are not backed by collaterals. Like:

  • Lower interest rates
  • Higher Borrowing limits and
  • Linger Repayment Terms.
  • Some of the popular Secured loans:
  • Mortgage
  • Home Equity Line of Credit
  • Auto Loan
  • Boat Loan
  • Recreational Vehicle Loan