What is a secured loan and how does it work?
A secured loan is money borrowed through your assets.
This means you are using things, such as your car or home, as collateral.
Using a secured loan is a smart way to finance your student loan.
Here we discuss how a secured loan works and what assets you can use as collateral.
(Did You Know? A Consolidation can lower payments, reduce a loan term, provide forgiveness benefits, and average out high-interest loans. Find out if you should consolidate your federal student loans with the complete 17-page guide of the most important factors to consider. Click here to learn more and get the free guide.)
What is a Secured Loan and What Resources to Consider
1. Investments
Certain investments, such as stocks, can be used to obtain a secured loan.
Investments used as collateral for loans are typically securities-based loans.
Entities that usually offer these kinds of loans include brokerages or private banks.
They usually provide secured loans for individuals with existing investment with them.
The lender can match the full amount of the borrower’s investment portfolio with the borrower’s credit line.
The downside is that investments do tend to fluctuate.
Drawbacks may exist with this type of loan.
2. House or Home Equity
One of the most commonly used collaterals for any type of loan is your property.
A lender, usually banks, can foreclose a property when the loan defaults.
Home equity can also be used as collateral for a secured loan to consolidate your student loans.
Home equity is a form of a secured personal loan, hence the term home equity.
A house is a valuable asset.
Therefore, you should make sure you have a plan to pay off your mortgages and your secured loan to avoid losing your home.
3. Car or Other Vehicles
Another common type of security used for secured loans is your car or some other vehicle.
A car or even a boat can be used as collateral for a secured personal loan.
Most private banks or other lenders deal car equity loans at reasonable terms.
A car used for collateral is ideal for young people dealing with student loans.
However, to be able to use your car as collateral, it should have been bought outright.
If your car is under a loan, you need to owe less than the current value of your vehicle.
Checking with your lender may also help you identify if your loan terms will accept your car or your boat as collateral for a secured loan.
4. Bank Savings
Most banks usually offer a savings-secured loan.
Just like investments, banks or other lenders provide this since you already have an existing account with them.
Savings-secured loans allow you to keep your cash savings liquid while availing the secured loan.
Fortunately, the accounts will continue to earn interest even as you use them as collateral.
Obtaining a guaranteed loan from your savings deposit account can also repair your credit.
This happens when you consistently pay your secured loan.
5. Upcoming Paycheck
Even a future paycheck can be used as collateral for your secured loan.
You can obtain this loan with a deal that you will settle as soon as you get your paycheck.
However, you may mix this up with cash-advances, which are pricey to obtain.
This can be an ideal option, especially for individuals who just got a job and are trying to find a way to pay their student loan.
Want to know more about secured loans? Watch this video from Wells Fargo:
Looking for collateral to consolidate student loans can be tricky.
It depends on what you think is practical and what options you have.
For young individuals, the obvious choices would be a car, a savings deposit, or an upcoming paycheck.
Investments and a home used as collateral are for parents or individuals who have already managed to start a life or a family.
(Bonus Tip: Want the complete guide to knowing whether or not you should consolidate your loans? Here are the 17 Most Important Factors To Help You Decide If You Should Consolidate or Not. Click here to learn more and get the free download.)
Do you have other questions about what is a secured loan? What about suggestions on what collateral to use in obtaining a secured loan? Let us know your thoughts in the comments below!
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