How Does Secured Loans Work

Secured Loan Planning

Having a secured loan is a serious, personal financial affair and it takes plenty of planning and preparation to get the right secured loan for your particular needs, along with a good plan to repay the loan.

The best approach is to know the risks, partner with the right lender and provide a contingency plan if you should face any financial problems when repaying your secured loan. Covering those key issues and wanting to keep your precious belongings in your name can be the main reason for needing a secured loan.

A secured loan requires collateral — these are financial assets that you own, such as a house or a car— that can be used as a payment to the lender if the loan is not repaid. When you apply for a secured loan, the lender will expect you to list the collateral that you will use to support your loan.

A share-secured loan is geared towards short-term borrowing needs.This form of credit, allows you to use your own money as collateral and the funds will be deposited into a savings account. Apart from offering a convenient way to borrow money, when repaid on time, share-secured loans may help to create or repair your credit rating.

Here’s how to determine if a share-secured loan will repair your credit rating

Why Do Secured Loans?

Secured loans use your interest-bearing account as leverage, such as deposits, money market or deposit certificates. These loans have an affiliation with the credit unions and therefore, they are called share-secured loans. Justin Pritchard, a licensed financial planner at Approach Financial Planning based in Montrose, Colorado, says: “Technically, credit union members are partial owners of the company, and they have a share of ownership, and their accounts are called partnership accounts”.

Banks do offer this loan option to consumers, although the banks call them, savings-secured loans. Aside from needing collateral, share-secured loans are not that different from the other forms of personal secured loans.

When applying for a secured personal loan, you would have to give the lender some form of collateral, it doesn’t necessarily have to be cash savings. You are able to secure a loan, for example, with a car title, a piece of property that you own, or an investment. Secured loans can provide lower interest rates than unsecured loans because you are a risk to the lender, however, you risk losing your collateral if you should default on a share-secured loan. An unsecured loan reduces the risk of you losing your security, but anticipate a higher interest rate, to compensate the lender for the higher risk.

Why use a Share-Secured Loan?

Potential credit building capability is one of the key advantages of using a share-secured loan.

A share-secured loan is repayed by installments. Refunding installment loans in a timely manner will help you increase your credit score because a strong history of payment holds the most weight when deciding on your ranking.

If the shared-secured loan increases your credit balance, the installment loan also boosts your score in a different way. Although the loan history is 35% of your FICO credit score, the credit mix is 10%, which is the type of credit facility you use. Credit-scoring models will look favorably on individuals in charge of both using home loans and revolving credit programs, such as credit cards. You have the option to add points to your credit score by applying for and repaying a share-secured loan on time, because you already have a credit card.

You may find a share-secured loan to be a step towards other forms of credit. For example, if you plan to purchase a home, you can be encouraged to apply for a mortgage by using a share-secured loan to increase your credit score.

How to Apply for a Secured Equity Loan?

One advantage of equity, is that it can be easier for you to qualify for other forms of personal loans. “Usually, having your savings serve as leverage, means the banks take very little risk,” Pritchard says. As a result, “if you have a less-than-perfect record or lower income than they would like, they are more likely to accept your loan,” he says.

Approval for a share-secured loan can be a swift process, depending on bank or credit union requirements. When you apply for a share-secured loan, the lender must check your savings and, “OK”, your loan application.

Unlike certain other types of loans, the acceptance of a share-secured loan needs no review of your credit rating. If you borrow money from yourself legally, rather than from the bank or credit union, qualifying you for a loan may depend more on how much funds are available in your savings account.

This does not mean that when applying for a share-secured loan, that your credit score doesn’t matter. The interest rate that you pay for borrowing from the lender will also influence your credit history.

If you have an immediate cost, or you want to make some home improvements, or you need to accumulate debt, a personal loan might help you. We are here to help you understand how personal loans operate, weigh the choices and to help you decide which loan option would be right for your needs. If you use the money wisely, including paying off high interest credit card debt, having a personal loan might be a smart decision for you. How does secured loans work? Remember when deciding whether you will seek a personal loan in order to repay your credit card debts to consider USA Funding Pros.