Secured loans refer to loans which use some type of asset as collateral. Common secured loans include mortgage notes, automobile and business loans. Lending criteria for secured loans is typically more stringent than when applying for unsecured or subprime loans. Oftentimes, lenders will require a co-signer for applicants with poor credit or low FICO scores.
Interest rates against secured loans are lower than other types of loans; making them a good choice for loan consolidation, business loans, and home equity line of credit (HELOC). Prior to entering into title loans it is best to comparison shop to determine which lender offers the lowest rate of interest and best terms.
Collateral assets can be repossessed and sold if borrowers default on the loan. Therefore, it is crucial to carefully calculate finances to ensure payments can continue if an emergency arises. While borrowers might be able to afford a $1500 monthly mortgage payment when taking out the home loan, they must factor in how to make payments in the event of job loss or health problems which could prevent them from working. Otherwise, if catastrophe strikes, borrowers could potentially lose their home to foreclosure or forced into bankruptcy.
Borrowers often make the mistake of miscalculating interest applied against secured loans. Banks are notorious for double-talking when presenting loan papers to borrowers. Consumers are protected against deceptive lending practices under the Truth in Lending Act. Also known as Consumer Credit Protection Act, truth in lending requires lenders to quote the annual percentage rate (APR) applied against the loan.
APR is charged as a percentage and can include not only interest, but loan fees and charges. If borrowers obtain a $100,000 secured personal loan with an 8-percent APR, they will accrue interest at the rate of $8,000 per $100,000 borrowed on an annual basis.
Debtors should take time to review repayment schedules of secured loans or secured debt consolidation loans. Some lenders offer accelerated loans which allow borrowers to repay the debt in less time. Mortgage notes which are repaid in 15 years will have a higher monthly payment than 30 year terms.
It is important to calculate accumulated interest charges, along with monthly payments. If borrowers have a $1000 mortgage payment for 15 years vs. a $500 mortgage payment for 30 years, it might be smarter to extend home mortgage payments. Borrowers can deposit the money they save in an interest bearing savings account, certificate of deposit or investment account instead of being strapped for cash each month.
Borrowers should also ask lenders about secured loan prepayment penalties. This is particularly true with home loans because nearly all banks impose some type of monetary penalty when borrowers pay off loans early.
Prepayment penalties are sometimes as high as 8-percent of the loan balance. If borrowers refinance mortgages at a later date they could be faced with a prepayment penalty on first and second mortgages along with closing costs of the refinanced loan.
When shopping for secured loans it is best to stick with FDIC lenders. The best source for locating banks insured under FDIC, along with resources and information about secured loans is through the Federal Deposit Insurance Corporation website at FDIC.gov.
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