Credit can be confusing. There are many different types of credit and understanding them before borrowing is important. Secured credit is one of the most popular types of credit and usually the easiest to get. Secured credit is when you place an asset up as collateral for the loan. Basically, if you default on the loan the lender takes ownership of whatever asset you used as collateral.
Secured loans can be closed end or open end. Closed end loans are usually just called a loan. With this type of secured loan the collateral is usually what you are getting the loan to buy and the lender holds ownership over it until the loan is completely paid.
Some examples are auto loans and home loans, where the lender is the owner of the auto or home until it is fully paid off. An open end secured loan is often called a line of credit. This type of loan is secured with a deposit of either cash or an asset. An example is a home equity line of credit where you use the equity in your home to get a loan.
The difference between the two types of secured loans is really in the details. A closed end loan is usually the only way to buy very expensive items, like a home. The bank is investing a large amount of money and by retaining ownership of the home they are guaranteed to be able to recover at least part of their investment should you default on the loan.
An open end secured loan is a common option for people who are having credit troubles. Many credit card companies offer special cards that require a deposit. In this case the credit card company is guaranteeing they will get their money should you default.
The basic idea of a secured loan is for the lender to protect themselves. Even for people with excellent credit, large loans are a risk to the lender. By having that security of a deposit or asset the lender is guaranteeing that they will not lose everything should you end up not paying the loan. Secured loans are common place in the world of home ownership.
Almost every home owner at least starts out with a secured loan, called a mortgage. As mentioned, credit card companies are developing cards to help those with less than perfect credit get their credit in order. These secured cards are becoming a great option for those wanting to rebuild their credit.
Secured loans are often the easiest loans to get because of the fact the lender has something to recover should you default. Lenders are still going to be picky, though. They will still check your finances and your credit. Even though they have that deposit or asset, does not mean they will automatically give you a loan.
In some instances, like with auto loans, even though they retain the ownership of the auto, should you default, they will not necessarily be able to get all their money back. This is because the value of the auto will go down with time and will not be worth as much as it was when you bought it.
A secured loan may be your best option, but it is wise to keep in mind that you still must qualify, even for a secured loan.
By: James Copper-5768