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What is a Secured Loan?

What is a Secured Loan

When we talk about car title loans we often mention that they are secured loans. Read some information about title loans and you’ll see this term used often. So what exactly is a secured loan?

Secured loans are those loans that have collateral associated with them. This means that the lender has a secured interest in a piece of property. The property has a value that is either equal to or greater than the loan amount. In the case of a car title loan this property is the vehicle itself.

Secured Loans provide Lenders with Lower Risk

The fact that lenders have collateral reduces the risk of recovering their cost should the borrower default. This give the lender security. If the borrower fails to honor the commitment identified in the loan agreement, the lender can take possession of the collateral. Then they may sell it and use the funds to cover the cost of the loan.

Lower Risk means Credit Scores Matter Less

By taking a security interest in collateral for the loan the lender can rely less on your credit score and more on the collateral. This is the case with title loans.

You do not need good credit to get a title loan, just a vehicle with enough value to support the loan amount. Your vehicle, and more specific the value of your vehicle, provides the means for getting the loan.

Now that we’ve explained secured loans, we should also mention that there are unsecured loans.

What is an Unsecured Loan?

There are also unsecured loans. These loans are made without collateral tied to them. The verification that you will repay these loans is your word. This is where credit scores and credit history come in.

The determination by the lender on whether or not to make an unsecured loan is highly reliant on your credit score and history. Having a low credit score, and a less than ideal credit history, can make it very difficult to obtain an unsecured loan.

Secured Loan Examples

Secured Loans
Secured loans include both car loans and car title loans.

Secured loans can include a wide range of different loans that involve collateral. Some common secured loans include:

  1. Car Loans – Both New and Used
  2. Home Loans – Both mortgages and Home Equity Loans
  3. Appliance Loans – Installment loans for appliances
  4. Car Title Loans – including online title loans.

The one thing each of these loans has in common is that if you default on the loan, the collateral becomes the property of the lender. This is done through the process of repossession. Learn more about secured loans.

Unsecured Loan Examples

Unsecured Loans
Unsecured loans include credit card cash advances and payday loans.

Just like secured loans, there are also many kinds of unsecured loans. These include:

  1. Credit Card Cash Advances
  2. Personal Loans
  3. Student Loans
  4. Payday Loans

The one thing each of these loans has in common is that, unlike secured loans, there is no collateral for the lender to repossess. If you default on an unsecured loan your credit will be affected and the lender may pursue a civil judgement.

Defaulting on any loan is not ideal. For an unsecured loan there is no risk of collateral repossession, although your credit score and credit history will be negatively affected. Additionally court costs and judgements may add additional costs.

Confusion over Collateral for a Title Loan

Some people have asked us about the collateral for the title loan, stating that a lender told them the collateral is the title and not the vehicle. This is simply not the case; even though the car is being driven.

This is the same as when you purchase a new car. Even though the lender only has the title, the actual collateral for the loan is the car. If you stop making new car payments then the lender will likely repossess the vehicle.

The same could be said about a house. The lender does not possess the house, only the title (deed) to the house. If you stop making your mortgage payments, then the lender will likely foreclose on the house and sell the property.

The Vehicle is Collateral

We hope this explanation clears up any confusion about collateral for a car title loan. The vehicle is collateral for the loan. This is true regardless of who is driving.

While you do leave the title with the lender and continue to drive the car, this does not mean the title is collateral.

Car Title Pawns

A Car Title Pawn is very similar to a title loan, usually with a very short repayment term. Similar to a car title loan you keep driving the vehicle and leave the title with the lender. This does not mean the title is collateral for the loan, the vehicle is.

If you default on a car title pawn you can lose you vehicle, just like you would with a car title loan.

The vehicle itself is the collateral for a secured title loan. This means if you default on a title loan the lender may repossess your vehicle.

Conclusion

Secured loans are those loans that have collateral securing the outstanding debt. This means there is property that the lender can repossess and sell to cover the cost of the loan should the borrower default. Therefore, these loans have less risk for the lender, since they can attempt to recover any losses.