4 Types of Secured Loans and How They Work

Within the past year, approximately 84 million Americans have borrowed money from lenders. Some of the loans were unsecured. The majority of consumers borrowed money using secured loans.

Secured loans are popular with lenders and borrowers. For the lender, secured loans reduce the financial risk if customers default on their loans. With secured loans, borrowers can benefit from lower interest rates.

In the financial industry, there are several ways to borrow money using collateral. Here are the 4 most common types of secured loans.

1. Car Title Loans

A title loan is a loan secured by a vehicle title. Thousands of people each year turn to title lenders to help them through rough financial moments.

How car title loans work: When customers enter into title loan agreements, they use their vehicle to secure the loan. After the loan contract has been signed, the customer will give the lender a copy of the vehicle’s title.

The lender will provide the customer with the loan cash, check or direct bank deposit. A copy of the contract will be sent to the motor vehicle department in the state where the customer resides.

A short-term lien will be registered to the vehicle. When the customer repays the entire amount of the loan, the lien will be released from the vehicle.

2. Home and Property Mortgages

Most people don’t have enough cash to pay for a home without financial help from a lender. Mortgages are loans that are secured by a home, land or other property that’s being purchased by the borrower.

How mortgages work: Many mortgages have strict lending guidelines. In most instances, borrowers have to qualify for a mortgage based on their credit scores and income.

After a mortgage contract has been written and signed, the borrower must abide by the conditions and terms of the loan. This means that the borrower must make timely payments.
If a borrower repays the original loan amount and interest as promised, the borrower will own the property. However, if the borrower misses a mortgage payment, the lender has the legal authority to foreclose on the property and take it back from the borrower.

3. Automobile Loans

The average cost of an automobile is approximately $31,000. Since most people can’t afford to pay cash for a vehicle, they must get an automobile loan to finance the purchase.
How automobile loans work: Automobile loans use the car that was purchased by the borrower to guarantee the loan. The borrower must make vehicle payments on the due date each month until the loan has been repaid. If the borrower doesn’t repay the loan, the lender can repossess the vehicle to recoup their losses.

4. Pawnbroker Loans

There are thousands of pawnbrokers in the United States. Pawnbrokers provide secured loans on a variety of property including jewelry, electronics and instruments.

How pawnbroker loans work: A borrower takes personal property to the pawn shop. The pawnbroker gives the borrower a loan that must be repaid with interest. If the borrower doesn’t repay the loan, the pawnbroker can sell the property.

Secured loans are good sources of cash for people who need money to purchase cars, houses or other expenses.

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