A mortgage is one of the most common types of secured loans.
Your home is the collateral.
If you dont make your mortgage payments, your lender will start the foreclosure process to seize your home.
Most personal loans are unsecured loans, meaning they arent backed by assets you own.
What Is a Secured Loan?
If you dont make payments according to the loan contract, the lender can take those assets.
Secured loans are commonly used to finance major purchases, like a home or vehicle.
But its also possible to obtain a secured loan for virtually any purpose.
Suppose you better borrow $5,000, so you apply for a personal loan.
But because you have a lowcredit score, your bank requires collateral.
Lets say you own your car outright, and its worth $10,000.
You could use your car as collateral to get a secured personal loan.
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Theres less risk to the bank.
If you fail to make monthly payments, the bank can take possession of your car and sell it.
But the risk is greater to you because you could lose your car if you default.
But as long as you repay the entire loan amount as agreed, the lien will be removed.
Keep in mind that theres still a risk to you even when you take out an unsecured loan.
If you dont make monthly payments, your credit score will drop.
Eventually, the account will be sent to collections.
Defaulting on the loan will make borrowing money much more difficult in the future.
Your lender can still sue you if you dont repay the loan.
it’s possible for you to also damage your credit if you dont pay as agreed.
Unsecured loans usually have higher interest rates than secured loans because of the greater risk involved.
Compared to unsecured loans, secured loans typically have higher borrowing limits.
The property that you finance serves as collateral.
If the borrower defaults, the bank can foreclose on the home.
Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder.
She writes the Dear Penny personal finance advice column.
Send your tricky money questions to[email protected].
