Dos and Don’ts of Taking Out a Secured Loan

A secured loan is backed by collateral, a valuable asset you own, like a house or car. If you fail to make loan payments and default on the loan, the lender has the right to seize your collateral to recoup some or all of the money they’ve lost. Therefore, a secured loan is less risky for a lender and, in turn, can be easier to qualify for.

While there are many types of secured loans, the most common are mortgage loans, vehicle loans, secured credit cards, and secured personal loans. While collateral requirements vary by loan type and lender, assets like your house, car, cash in savings accounts or certificate deposits, or even jewelry or fine art are often eligible. If you decide to get a secured loan, be sure to keep the following dos and don’ts in mind.

Do: Check Your Credit

Even though it might be easier to get approved for a secured loan than an unsecured loan, it’s important to understand where you stand credit-wise. Visit AnnualCreditReports.com to pull free copies of your credit reports from the three major credit reporting agencies, Equifax, Experian, and TransUnion.

If you notice any errors or inaccuracies, dispute them with the appropriate credit bureau. Doing so and improving your credit may land you a lower interest rate and more favorable terms.

Do: Compare Interest Rates

Accepting the first secured loan you get approved for might be tempting. Doing so, however, might cost you hundreds or even thousands of extra dollars over the life of the loan. That’s why you should shop around and compare interest rates before committing to a loan. Many lenders allow potential borrowers to see if they’re prequalified for a loan. By seeing if you prequalify, you may find out which loan offers are available to you without impacting your credit score.

Do: Consider the Risks

While you may be able to get a secured loan without good credit, you may have to settle for a higher interest rate. If you have a trustworthy friend or family member with a solid credit score, you might want to ask them if they’re willing to be added as a co-signer. Having a co-signer can improve your approval odds and may even mean you’ll get offered a decent or even good interest rate. Remember that if you default on the loan, the co-signer will be legally responsible, and you put an asset you may need on the line.

Do: Pay Attention to Fees

In a perfect world, a secured loan would come with no fees. The reality is that many lenders charge fees in addition to interest. These may include:

• Application fees
• Origination fees
• Annual fees
• Closing costs
• Prepayment penalties

Make sure you know all the fees you’ll have to pay and feel confident you’ll be able to afford them before you sign off on the loan.

Don’t: Forget to Research the Lender

Not all lenders are created equal. Before you commit to a secured loan, research the lender. Look at its website and read reviews on reputable review sites. Make sure it’s a legitimate organization with a positive reputation. Reviews that mention excessive upfront fees, sky-high interest rates, and unreasonable promises are all red flags.

Don’t: Borrow the Maximum Amount Possible

Look at your budget and determine how much you can afford to repay. Just because a lender offers you a $50,000 secured loan, for example, doesn’t mean you should agree to it. Overborrowing can steer you into a cycle of debt very quickly.

Don’t: Forget to Make Payments

Once you take out a secured loan, it’s your responsibility to repay it according to the terms of the agreement. Even one missed payment can take a toll on your credit, so it’s crucial to make every payment on time, every time. Missed payments can also cost you a lot in interest charges.

Another thing to note is that if you fall too far behind on your payments, the lender may seize the collateral you provided in exchange for the loan. For example, the lender can repossess your vehicle or foreclose your home for nonpayment.

The Bottom Line

A secured loan can be a valuable financial tool as long as you choose the right one and repay it on time. Whether you’d like to buy a house or car or simply want some cash to remodel your home or cover an unexpected car repair, it’s worth exploring.

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