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How Secured Loans Are Different From Unsecured Loans

Should You Take Out a Secured Loan?

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Secured loans are loans that are backed by an asset, like a house in the case of a mortgage loan or a car with an auto loan. This piece of property is collateral for the loan. When you agree to the loan, you agree that the lender can repossess the collateral if you don't repay the loan as agreed.

With secured loans, the lender takes possession of the asset when you default on the loan. The same isn't true for an unsecured loan. With an unsecured loan, the lender can't automatically seize your property as payment for the loan. Lenders can (and do) report late payments and loan default to the credit bureaus with both secured loans and unsecured loans.

Even though lenders repossess property for defaulted secured loans, you could still end up owing money on the loan if you default. When lenders repossess property, they sell it and use the proceeds to pay off the loan. If the property doesn't sell for enough money to completely cover the loan, you will be responsible for paying the difference.

People sometimes choose secured loans because their credit history will not allow them to get approved for an unsecured loan. Because secured loans are backed by assets, lenders have lower risk in extending a loan to you.

Secured loans also allow borrowers to get approved for higher loan limits. Even though you may qualify for a larger loan, you still must be careful to choose a loan that you can afford. When you’re choosing secured loans, make sure you pay attention to the interest rate, repayment period, and monthly payment amount.

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