You will learn that when BORROWING money you will encounter two general options that can be attached to the loan. A MONEY LENDER would normally ask you whether you would want the loan to be secured or unsecured. Generally, collateral is needed when you opt for a secured loan. Collateral is an asset with a value that is the same or more than the amount being borrowed. Secured loans are normally used to borrow large sum of money. This is the main reason borrowers are required to put up collateral on the loan. Lenders when being ask for a large amount would normally make sure that the risk they would take would not be too big and having the loan secured by the borrower would be the best resolve. In return, lenders give a lower interest rate on the loan. Secured loans are riskier for the borrower considering that he might just end up forfeiting the collateral in the event that he is not able to repay the loan. Secured loans are also known as Home equity or home loans wherein you use the remaining value of your property as collateral; they are also known as first charge mortgages if this is the first time that the property is mortgaged or put up as collateral and second charge mortgage if there is a need to restructure the first mortgage to get additional money for the property.
Pros and Cons of Secured Loans
The advantages of getting a secured loan are lower interest that one have to pay on the loan (and this is because of the collateral you have put up on the loan) and second the loan is usually amortized thereby giving you an easier time repaying the debt. You can even negotiate the duration on how long you would want to pay the loan. The main disadvantages are the probability of losing your home in the event of a default and more often than not, secured loan incurs variable rate of interest. This means that there is a chance that repayment terms may increase depending on the movement of the interest rate.