When to Apply for a Secured Loan

Sometimes it is necessary to apply for a secured loan even if you have a high credit score. This may not have anything to do with what is on your credit history or whether you have the ability to pay, but rather because there are times when lenders prefer to have security for a loan.

Definition of a secured loan

A secured loan is a loan that is secured by some type of tangible property such as a motor vehicle or real estate. In some cases a lender may accept a security interest in a savings account or investment account such as stocks and bonds.

Most people think of a mortgage when they think of a loan that includes a security interest, and though that is the most common loan of this type, there are others as well. Sometimes when you buy furniture on credit the lender will hold a security interest in the furniture allowing them to repossess it if you don't make your payments.

Why you may need a secured loan

Even if you have excellent credit, there may be times you will have to apply for a secured loan. The most common reason that comes to mind is because of the size of the loan proceeds. Lenders typically have a maximum amount of funds they will approve without a security interest. If the lender asks for collateral to back your loan, that doesn't necessarily mean you are a poor credit risk but that the lender's policy limits him in the size of loan he can approved without some type of security interest.

If your credit is substandard a lender may ask for security no matter how small the loan may be. You may need collateral in the form of a motor vehicle title, real estate interest, or any other liquid assets you may have including stocks, bonds, and securities. Motor vehicle titles and real estate are preferred, but sometimes the lender will make exceptions if you do not have a car title or enough equity in your home to secure the loan.

Real estate and car loans

Aside from a primary mortgage, you might also have a secured loan in the form of an equity loan or a car loan. Although car loans have always been secured by the title of the vehicle, loans secured by real estate can be for a number of reasons including the size of the loan, the strength of the borrower's credit, or the purpose of the loan.

In cases where the borrower wants to make improvements to the property, it is logical to take a loan against the equity in the home. The primary reason is because an equity loan usually has a lower interest rate than an unsecured personal loan and you will have a longer repayment term.

The same type of scenario may hold true with a car loan because the existence of a security interest will usually provide a lower interest rate and longer repayment term than an unsecured loan. That may not always be the case, but if you do some research on your own, you will find that in most cases loans secured by a vehicle title or real estate have lower interest rates than signature loans.

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