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What Is a Secured Loan? How They Work, Requirements, Collaterals & More

Dec 02,2024 · 4min read · 332 views

You may know at least one person in your family or social circle who has taken some kind of loan, whether for education, business or something personal like buying a car or house. If you are considering or might consider getting one, you should know there are two major types of loans - secured and unsecured.

The former type of loan is a financial tool that allows you to access funds by pledging collateral, such as property, vehicles, or savings, as security. You can obtain secured loans from banks, credit unions or online lenders.

There are several benefits to opting for a secured loan such as lower interest rates, higher loan limits, longer loan terms and more. There are also pros to taking an unsecured loan, but more on that later.

To help you make informed financial decisions, we have broken down how secured loans work, the types available, and the steps to obtain one.

Also Read: Didn’t Get Student Loan Forgiveness? Other Alternatives To Tackle Student Debt - Vola

What You Should Know Before Applying for a Secured Loan?

Here are important questions you need to find answers to before applying for a secured loan.

1. Are there any processing fees (origination fees) or prepayment penalties?
2. What can I use as collateral? And how much loan can I get against the asset?
3. What are the eligibility criteria (like income, credit score, etc) for a loan?
4. What is my interest rate and is it fixed or variable?
5. What is the annual percentage rate (APR) for the loan?

Once you have an overview of your loan needs, repayment duration, and interest rates, you can start comparing loan rates and terms offered by different lenders. You can do so through various means - lender websites, credible financial experts, and online secured loan calculators.

How Do Secured Personal Loans Work?

There are various types of personal loans you take from a bank. These include mortgage loans, bad credit loans, life insurance loans, secured credit cards, vehicle loans, pawnshop loans and more.

For collaterals, you can use your assets like a paid-off vehicle, an investment account including a certificate of deposit or money market, a house, a trailer, fine art, or jewellery. Once you submit the collateral, you cannot sell or liquidate the same asset without prior permission.

If you want a secured credit card, you can offer cash as collateral. When you deposit thousands of dollars to the lender, they will use this as your credit limit.

In the case of a secured business loan, you might have to sign a personal guarantee. For instance, if you default, the lender can sue you for the liabilities.

The lender will examine your financial behaviours, expenses, income and past debts. The lender will take a few days or weeks to assess the validity and value of your assets before processing the amount in your account.

What Happens if You Can’t Repay a Secured Personal Loan?

In the majority of cases, the lender will seize your asset if you fail to repay your secured loan. If the sale of your collateral covers the outstanding costs, you are in the clear. If the lender still faces loss, they might pursue you for deficiency balance depending on your state law.

Also Read: What You Need to Know About Delinquency and Not Paying Student Loans

Secured vs. Unsecured Personal Loans

In simple terms, secured and unsecured loans have the same purpose - to give you a lump sum loan and get back the amount with interest value in instalments till the balance is zero.

A major difference between secured and unsecured loans is that the former requires collateral such as a home, car, or savings, to back the loan, offering lenders a safety net in case of default. Most secured loans have lower and fixed interest rates, However, if you have poor credit, the bank might charge you higher interest rates.

In contrast, unsecured loans don’t require collateral and are based solely on the borrower’s creditworthiness and ability to repay. As a result, unsecured loans typically come with higher interest rates, lower borrowing amounts, and stricter credit requirements.

Secured loans can be a practical solution for those seeking substantial financing at competitive terms. You can leverage your collaterals to gain access to funds while lenders mitigate risk.

However, it’s crucial that you first assess your financial situation and understand the risks involved, including the potential loss of your pledged asset. By carefully researching your options and preparing thoroughly, you can navigate the process confidently and choose a secured loan that aligns with your financial goals.

This is How Biden’s Presidency Impacts the Future Home Buyers

May 05,2021 · 5min read · 2093 views

Many home buyers these days will probably get hit with the harsh reality of high prices and limited choices. There is some hope on the horizon. President Joe Biden and his administration plan on implementing certain policies and plans. They will regulate the housing market and mitigate social inequalities.

Real Estate Regulation

Biden’s new presidency will most likely result in stricter real estate regulation. He also promises an investment of $640 billion over the next ten years into the industry. The goal of this investment would be more affordable, safe, accessible, and healthy housing. Biden has also promised a new tax credit for new home buyers above $15,000, changing restrictive zoning laws to build development. He's also reintroducing sharper regulatory aspects to agencies, capping payments for some renters, and building affordable housing units. There have also been talks of keeping Government-Sponsored Enterprises (GSEs) such as Fannie and Freddie under conservatorship.

Interest Rates

With all of these new plans and promises, many believe that interest rates will continue to be at a low for the next few years while volumes will remain high. The economy is not in a stable enough state for rates to increase because of COVID-19. These promises will most likely go through as the Democrats have retaken the Senate. If the Republicans had kept ahold of the Senate, Biden’s proposed changes probably wouldn’t have gone through.

Fannie and Freddie

Plans to use Fannie and Freddie will decrease the wealth gap, support affordable housing, and cap payments on rentals are in the works. These policy changes and his injection will provide assistance for people to buy housing. Biden and his administration will assist through tools like a refundable and advanceable tax credit and rental assistance. These plans aim to target first-time home buyers as well as Hispanic and Black home buyers. There are potential problems with these proposed plans. For example, low inventory in regards to housing.

Rising Prices

This past December, the number of homes on the market decreased 40% compared to December of 2019. Homes also sold two weeks faster. Trump’s trade wars resulted in home prices have been rising and resources such as lumber and metal has climbed to new highs. The lack of immigration caused a shortage in labor. The shortage of workers might turn around with Biden’s administration. However, the tax credit he is proposing might not make it through Congress, even with Democrats in the majority in the Senate.

Federal Housing Finance Agency

Biden also plans on naming a new head of the Federal Housing Finance Agency (FHFA). This would better hold Fannie and Freddie responsible for putting through affordable housing goals. They won’t be free from conservatorship for the next few years as the proceeds that will probably go towards affordable housing will come from feeds on government-backed loans. There will be more regulations under Biden’s administration, which will increase the cost of credit and make it less available. Biden also is planning on increasing the lending that the FHFA provides and reducing monthly insurance premiums. This will also hopefully help decrease the inequalities in race, economic, and education that we see today. They are also trying to pressure banks back into FHA lending which could help to increase the availability of affordable mortgages.

Community Reinvestment Act

Along the lines of policy change, Biden plans on strengthening the Community Reinvestment Act which holds banks to the obligation of reinvesting funds from communities they take deposits from. Banks are held to this Act. Biden plans on making it apply to nonbank lenders as well in order to better help low-income areas. Increasing loans to low-income homebuyers and building more affordable housing will create more high-density multifamily buildings. However, this could have a negative effect on the environment--another key aspect of Biden’s campaign.

Rates

Lastly, mortgage rates are increasing. Previously, low rates gave home buyers more buying power and let them be more competitive in the market. The only reason rates were low is because the Federal Reserve was buying mortgage-backed bonds as a result of the pandemic. They wanted to help stimulate home-buying by letting people refinance their mortgages at low rates which would stimulate the economy. The rise in rates will increase slowly and a stronger economy will help to offset the rise in rates.

Conclusion

If Biden’s proposed tax credit is implemented, it would create a permanent, refundable tax credit for first-time buyers. This means that they would get the tax credit immediately when they purchase their home instead of waiting until they file a tax reform. Biden and his team see this as a type of “down-payment” assistance. However, this could possibly cause more harm because demand would rise in a market where there is already a shortage. As a result, people are going to be paying more to purchase a home.

Resources

https://www.housingwire.com/articles/what-a-biden-victory-would-mean-for-the-mortgage-industr

https://www.cnbc.com/2021/01/19/biden-looks-to-give-a-big-boost-to-homebuyers-and-builders.html

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