If bad credit history is proving to be an obstacle in procuring a loan, you can use a secured loan to build your credit. By pledging some kind of collateral, like your savings account for instance, you are able to secure your loan. In the event that you fail to pay the loan back, the lender will claim your collateral instead!
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Why use secured loans?
You can use secured loans for virtually any purpose. You can fund your college educations, renovate and refurbish your home, consolidate your debt and even use it to go on a vacation. Perhaps the greatest benefit associated with using a secured loan is that it improves your credit score, since the payments that you make for your loan installments are regularly recorded in your credit history.
How Does Collateral Work?
Collateral is the asset or the security that you pledge to the lender against the amount of loan that he extends to you. It provides the lender a kind of guarantee against loss. The collateral is generally of a higher value than the amount of the loan and bestows upon the lender the legal right to lay claim to the asset in case of failure to repay the loan amount.
The borrower benefits from obtaining the desired loan amount at a much cheaper interest rate and can also enjoy an extension in repayment term. The collateral can be any asset of value: your home, vehicle, jewelry, foreign exchange, debt and equity securities etc...
Relationship between the amount of loan and value of Collateral
There is a direct relationship between the amount of loan that can be obtained and the value of the asset that is put up as collateral. The assets' worth limits the amount of credit that you can obtain. If, in case, the value of your collateral exceeds the amount of credit you have borrowed, you can further extend the amount of loan by the difference between the value of asset and initial borrowing.
Loan Repayment Term
The loan repayment term is subject to several factors which include the type of loan, the value of the collateral and the creditor's past score and credit history. Subject to these considerations, loan repayment terms can range anywhere from between 1 year to 25 years. Interest rates are determined by the length of the loan repayment term: longer repayment terms are generally accompanied by higher interest rates and vice versa, though there may be some exceptions.
A Viable Solution
Borrowers with poor credit score and a history of defaults can enjoy the acceptance of their loan applications, provided they come up with a collateral. When suitable collateral is put into the equation, loan applications are seldom rejected. However, the transaction is still not risk-free. Therefore, when large loan amounts are in the picture, a higher interest rate is charged, which accounts for the element of risk.
Since secured loans actually help improve your credit score, this accrues benefits for you in the future as well. An improved credit score allows you to refinance loans in the future, while enjoying lower interest rates that may lead to incredible savings in repayments!