Financial Word of the Week: Secured Loan and Collateral
What is a secured loan?
The word secured brings to mind images of armored trucks and locked vaults. Both can guard cash and valuables, but not a loan.
A secured loan is a loan in which the borrower pledges property (e.g. a car, house or other property) to the lender to act as a source of repayment if the borrower cannot pay back the loan. The property that is pledged is called collateral. If you do not make the payments as required on the loan, the lender may sell the collateral to cover the amount owed. Usually a lender will require security for high dollar loans or when your credit is not good enough.
The opposite of a secured loan is an unsecured loan, which does not require collateral. A lender may give you an unsecured loan when the borrower’s credit history is strong and the amount loaned is for lesser amounts. Most credit cards are unsecured loans.
So what does this mean for me?
Secured loans can help you make large purchases and pay them off over time. If everyone had to save for the full purchase price of a house, most people could not afford to be a homeowner until middle age, if ever. Because of the security provided by collateral, banks can provide lower cost credit options through secured loans. Your first step before borrowing should be to do a financial checkup (stay tuned for next week’s blog post to learn more about that) and figure out if you’re financially ready for that large purchase.
Statistics Source: New York Fed Household Credit Quarterly Report‡
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UMB Financial Corporation (Nasdaq: UMBF) is a diversified financial holding company headquartered in Kansas City, Mo., offering complete banking services, payment solutions, asset servicing and institutional investment management to customers. UMB operates banking and wealth management centers throughout Missouri, Illinois, Colorado, Kansas, Oklahoma, Nebraska, Arizona and Texas, as well as two national specialty-lending businesses. Subsidiaries of the holding company include companies that offer services to mutual funds and alternative-investment entities and registered investment advisors that offer equity and fixed income strategies to institutions and individual investors.
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