Understanding Secured Loans

What Is A Secured Loan?

A secured loan is a loan that is secured by something. That something is called the collateral. The collateral can include property or possessions. Common examples of items used for collateral are homes, cars, boats and land. Certain possessions can also be used as collateral. For example an expensive piece of furniture, electronics or other high value item such as jewelry may serve as collateral. By far though, property such as a home or land serves as the most common form of collateral in a secured loan.

How Does A Secured Loan Work?

As with any other loan, you must first apply and complete an application for a secured loan. Often times, you will have to provide proof of income and financial statements of any assets you may own such as stocks or bonds. You may also have to provide the lender with your current expenses and detail any debt you may already have.

Most lenders will also require that you describe in detail what the loan is being used for. For example, will the secured loan be used to pay of existing debt such as credit card debt or student loans? Or will it be used for a home improvement project or other personal expense. This is often a big determinant in whether you will be granted a loan.

Of course, what you offer as collateral plays a major part in the loan process. If you offer an apartment worth $200,000 as collateral, you should be able to secure a loan for around that amount. Offering a guitar that is worth $500 as collateral will obviously only be able to secure you a loan of less than $500. If you default on your loan, you lose your collateral.