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by Answerbag Staff on January 23rd, 2010

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What are secured loans?

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  • by Hayley Harrison on January 23rd, 2010

    Answerbag Experts

    Great Answer

    Professionally Researched. (What's this?)

    When applying for a loan, banks and other financial institutions offer a variety of products to choose from, including secured loans. This type of borrowing uses collateral as a guarantee for repayment of the amount borrowed.

    Function

    With a secured loan, a financial institution gives a borrower access to a certain sum of money in exchange for a pledge of some type of property by the borrower. This property is called the collateral.

    Collateral

    Collateral used for secured loans may include automobiles, homes, the balance of savings or investment accounts, stock certificates or the cash value of life insurance policies. The value of the collateral must be equal to or greater than the value of the loan.

    Interest

    In exchange for granting the requested money to the borrow, financial institutions charge borrowers a fee known as interest, which is equivalent to a percentage of the amount owed on the loan. The interest rate of secured loans is often lower than those that require no collateral.

    Types

    Secured loans may be installment loans, meaning that money is given in one lump sum with borrowers repaying the amount in equal payments for a specific period of time. Secured lines of credit allow borrowers to draw money from an available balance and make minimum payments monthly with the ability to re-borrow the money as the debt becomes repaid.

    Considerations

    If the borrower stops paying on the loan, the financial institution has the right to claim the collateral to recover the amount owed for them. This could mean repossessing a vehicle, foreclosing on a home or liquidating investments.

    Source:

    Investopedia: Secured Debt

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