Finding loans nowadays is substantially difficult compared to the good old days of stable financial institutions. There are plenty of requirements and papers that will be analyzed and look over when you apply. Lenders will go as far as entering your home to check the things that you own, your background, job history, rental history and many other things. Perhaps, one way of getting your loan application approved easily is by looking for a secured loan. A secured loan simply means putting one of the things (collateral) you own under risk. They do this so that if you ever by any means fail to pay your debt, the ownership of the item or collateral goes to the lender. Collateral is something you offer to the lender such as a house, car, jewelery and other assets considered valuable. The purpose of this is to minimize the risk of the lender to replace the loss of your debt repayment should you fail to pay. Sometimes loan amounts vary strictly depending upon the value of the collateral.
You may have heard about an unsecured loan in the past and might be wondering: what are the differences between secured and unsecured loans? There are many. We will compare these below:
Secured loans vs. unsecured loans
- Secured loans are easier to find compared to unsecured loans
- Secured loans can be used as a credit builder while unsecured may or may not
- Unsecured loans have higher interest rates compared to secured
- Secured loans are often plagued by scammers due to their nature: collateral
- Unsecured loans can be a pain if not managed efficiently
Look at the side-by-side comparison above, you can see that secured loans win the ruling over unsecured loans in many, many ways. Does that mean that you should only apply for secured loans? No, sometimes an unsecured loan is better, especially if you have a bad credit score or rating. Nevertheless, there are still many things you must consider before choosing between the two and that is best saved for another article strictly on that topic.
Before diving head first into applying for a secured loan, you must have knowledge about how things work here. The first thing you should learn about is about the collateral. Collateral is something that the debtor pledges to the lender in the case that the debtor was not able to pay the loan, the lender will take the ownership of the collateral immediately. This is why you may hear certain phrases like “my house was taken by the bank!” take our word for it, secured loans are nothing to laugh about. In addition, there are a few different terms of a secured loan:
- Mortgage loans – the collateral is a house or a car or anything considered as a property
- Repossession – applies to a property that is being claimed by the creditor like a car, from which the borrower failed to pay for it (take the example of monthly installment for a car)
- Foreclosure – the process in which a mortgage is sold to pay the debt of the borrower
- Nonrecourse loan – means that the collateral is the only thing that the creditor can claim from the borrower
Looking for a secured loan is really quite easy. There are many banks in Canada that offer secured loans as well as different financial institutions and individuals. You can ask your local bank for details about their secured loan terms.
There are questions we receive from people with bad credit like “Can I avoid getting a secured loan?” A lot of pessimists may often say no, but the truth is “yes!”. However, expect to face higher interest rates than a normal secured loan. Then prepare to be bombarded by questions, standards and background checks from the lender.
A secured loan is the most common type of loan that is being offered by banks and financial institutions. You yourself given this situation would probably only offer a secured loan if you were about to lend money to someone at a high risk of default. In this scenario the borrow and lender are put on equal grounds in case of default. Keep this in mind for future loans. Another issue with bad credit loans and unqualified buys and the risk of default lately has been subprime mortgage loans. In this case the banks have had a very loose monetary policy that has lend to increased low cost borrowing which further let to inflated asset prices such as housing. Now that it has deflated, Canadian banks have learned from this mistake and have to comply with stricter lending regulations and standards.
