What is a Secured Loan and How does it work? | Secured Debt vs Unsecured Debt | Secured Debt
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What is a Secured Loan? How is it different from a Non-Secured Loan? And what would you even need a Secured Loan for - in this video. Right now!
So, what is a Secured Loan and how does it work?
If you watch the Rocking Finance Channel regularly, it means that you’ve made a Great decision Subscribing to it, and also that are preparing yourself to be able to handle your personal Financial life so good that one day you will have so much money that you will start lending it to other people. And why would you do that? Because it’s Capitalism, baby, that’s what we do.
When you lend money to other people, the number one priority for you as a lender is to make sure that you will get your money back. Obviously, the circumstances are different, so the requirements change from one situation to another.
One thing is when your family member or a close friend borrows like..hundred bucks from you, and a lot of times that money is basically a gift in the end.
Now, pretend for a minute that you are a Bank, and somebody you don’t know needs to borrow a few hundred or even thousands of dollars from you. You would definitely need something better than a handshake and a verbal promise to repay you, right?
When you want to borrow money, you need a solid proof that you CAN and WILL return it.
The classic way to guarantee the repayment is to give a lender an ownership interest in something that you already own. Those “things that you own” are also called Assets. You can learn about Assets in my other video on this channel - I will leave a link in the description.
So, when you guarantee the re-payment of the loan with your Assets, this is what’s called a Secured Loan!
The Two most obvious examples of Secured Debt I can think of are House Loans and Car Loans. In these cases you borrow money from a Bank to Buy the house or the car, and you guarantee the re-payment by keeping the House in the Bank’s Name, or having the Bank’s Name on your car’s title until you pay off the loan in full.
The Asset that you use to guarantee the re-payment, such as your House or your Car in this case, is called a “Collateral”. So, a Collateral is everything that the bank can take away from you, when you fail to pay off your loan. The bank’s right to take your Assets in that situation is called a “Lien”.
So yeah, it’s called a Secured Loan. Basically, you’re borrowing money from the bank saying like: “Hey, bank! Give me some of your money to buy a house or a car and if I don’t pay you back - you can take it away.”
Another Example, if you own a business and you need to borrow money for it to improve some things, the bank will ask you what would you use as a collateral. In that case you can use your business equipment, vehicles, land or buildings.
You get the idea, right? Secured Loans are guaranteed by a Collateral, not just your promise to pay back.
Loans that don’t require a Collateral are called Unsecured (a.k.a. Unsecured Debt). So, what's the main difference between, Secured Debt vs Unsecured Debt? Unsecured Debt is when you need your Credit Score and a Good Credit History, since that’s what the banks use to forecast the probability of your payback. Usually, Less risky Borrowers get Lower Interest Rates and vice versa. Unsecured Debt is more tricky, but is more common, once your Credit Score stabilizes at good values.
One more example of a, Secured Debt, is a Secured Credit Card, where you use the money that you already have as a Collateral.
I am going to make a separate video on Secured Credit Cards, so please leave the Thumbs Up to Support this Channel and to speed up the release of the new videos!
Also, in this video I used a bank as an example of a lender, but you can also get a Secured Loan from a Credit Union, or an online lender like Lending Club, or Prosper.
This summarizes my opinion on Secured Debt vs Unsecured Debt.
And what about you? What is your opinion about Secured Loans? Do you think they are necessary, or is it better to First Save Up the money and pay in full? Tell me in the comments below, and remember to check my other videos on this channel!
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