Secured Loans | Definition, Advantages & Disadvantages

A secured loan is a type of loan that is protected by an asset or a collateral. The items that is purchased from the proceeds of a loan e.g. a house or a car loan can be used as the collateral. Interest rates for secured loans are usually lower. If you fail to pay the loan as agreed, the lender will take possession of the item that was used as collateral. These can long term or short term loans.



The advantages of secured loans

The key advantages of secured bank loans include;

1. They are easier to obtain

These loans are always cheaper for anyone who has a decent credit score. This is because the bank is sure that it can recover the money that was given out in case you fail to pay as expected. It is still possible to get a secured loan when you have a bad credit history.

2. You can borrow over a longer period

The term of secured loans usually ranges from 5 to 20 years. Unsecured loans terms range from 1 to 7 years. Longer repayment periods help lenders to offset the hefty set up costs. However, as a borrower, you should keep in mind the fact that borrowing for longer increases the total amount of interest paid significantly.

3. Big borrowing possible

It possible to borrow more when you take an unsecured loan than an unsecured loan.

The disadvantages of secure loans

1. You could lose your home

If you do not make your loan repayments on time, you may end up losing your home or any other asset that was used as collateral. Many people have lost their assets after failing to repay the secured loans they took from banks and other financial institutions.

2. Variable interest rates

Secured bank loans have a variable interest rates. This can mean that the interest rate that will be charged in future may be higher than the interest rates charged today.