Things you will know after reading this article:
- What is a loan?
- What is a secured loan?
- Important steps to take in a mortgage loan
- What is a vehicle loan
- What is a secured credit card
A loan by definition is when money is given to another party in exchange for repayment of the loan principal amount plus interest. Loan terms are agreed to by each party before any money is advanced. A loan may be secured by collateral such as a mortgage or it may be unsecured such as a credit card. In simpler words, its when you borrow money from a friend in return you give a certain rate of interest, it may be secured or unsecured.
What is a secured loan?
A secured loan is a loan backed up by a collateral; like a financial asset or a personal asset, a home or a vehicle. The concept behind a secured loan is quite direct and simple- lenders accept collaterals and back up the loans to ensure the loan is repaid on time. Since the thought of losing a personal asset works as a powerful motivator for people to pay the loan, and save themselves from the entire hassle of repossession. While applying for a secured loan, the bank gets a Lien on your asset, a Lien is nothing but the legal right given to the bank to possess your asset in case you are unable to repay the bank.
The bank can keep the lien active until the loan is fully repaid, and can be lifted after. One should be wise when it comes to choosing the collateral for backing up the loan, because in case the borrower fails to repay the loan, they can sell the collateral and cover the losses. The collateral should be such that it adds enough weight during a period when the borrower sells it to repay the loan.
Types of collateral that can be used by a borrower:
A borrower can only use a collateral that is allowed by the law. However, the bank only seeks a collateral which is liquid or the value of the asset is roughly equal to the loan.
Here is a list of collaterals one can use-
- Real estate
- Stocks, Mutual funds
- Precious metals
- Highly valued collectibles
- Insurance policies.
There are three major types of secured loans:
A mortgage loan is the most common type, here the borrower sets up his/her home as a collateral, the bank gets the promise of getting the amount of loan back and if not, the borrower can lose the property. The application for a mortgage loan follows a process, as listed below:
The borrower has to give the lender the following information:
- Bank information such as the name, address, account numbers, and three months of statements.
- Three months of investment statements.
- W-2s, pay stubs, proof of employment and two years worth of income.
- Tax returns and balance sheets for the self-employed.
- Debt currently owed, including amounts due and account numbers.
- Divorce papers, if they apply
A car loan is secured against the vehicle you intend to purchase, which means the vehicle serves as collateral for the loan. If you default on your repayments, the lender has full right to seize the autovehicle. The loan is paid off in fixed installments throughout the loan. Much like a mortgage, the when a borrower takes out a loan on a car, he or she is agreeing to buy the car. Upon entering into the loan agreement the borrower gains the right to drive the car, while also taking possession of the car’s title (a document showing proof of ownership of a piece of property). Technically speaking, the borrower does not yet own the car; the lender owns the car until the borrower has finished paying off the loan lender retains ownership over the asset until you make the final payment.
SECURED CREDIT CARDS
Most credit cards are unsecured which means there is nothing guaranteeing or “securing” your ability to pay off the balance, which is basically money you owe the credit card company. Its contract with you has you agreeing to pay your balance in whole or in part each month, but you’re not putting up any of your assets or income to back that promise. (That’s one reason credit card interest rates are so high—unsecured debt always is more costly than secured debt, such as mortgages or a car loans, to compensate for the lack of collateral). With secured credit card, you out some amount of money as an agreement.
Taking a loan is an easy road to travel to reach your dream destination faster, however you need to be safe and cautious and ensure that you are following all the important rules and are abiding by all the legalities.