What Is a Secured Loan?

What Is a Secured Loan?

What Is a Secured Loan? A secured loan is a loan backed by collateral—financial assets you own, like a home or a car—that can be used as payment to the lender if you don’t pay back the loan.

The idea behind a secured loan is a basic one. Lenders accept collateral against a secured loan to incentivize borrowers to repay the loan on time. After all, the prospect of losing your home or car is a powerful motivator to pay back the loan and avoid repossession or foreclosure.

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Secured loan vs. unsecured loan in accounting

There are a couple of factors that go into deciding on a secured vs. unsecured loan. A secured loan is normally easier to get, as there’s less risk to the lender. If you have a poor credit history or you’re rebuilding credit, for example, lenders will be more likely to consider you for a secured loan vs. an unsecured loan.

A secured loan will tend to also have lower interest rates. That means a secured loan, if you can qualify for one, is usually a smarter money management decision vs. an unsecured loan. And a secured loan will tend to offer higher borrowing limits, enabling you to gain access to more money.

The advantages of a secured loan

Secured finance represents a lower risk for the lender because the asset ensures repayment in case of default. This leads to lower interest rates than unsecured equivalents and less strict requirements on credit rating and debt-to-income ratio. The former point means that secured loans may be easier to get than those requiring more stringent checks.

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