The Benefits of Secured Loans

Getting a secured loan can be a good option if you have an asset, like a car or house, that you’d be willing to offer up as collateral.

A secured loan also tends to have lower interest rates than unsecured loans, making it an appealing option for borrowers on a tight budget. However, you should be aware that your assets may be at risk if you default on the loan. Learn more about Second Mortgage.

Lower interest rates

Secured loans have lower interest rates than unsecured loans because the lender takes on less financial risk. Some secured loans, such as mortgages and home equity lines of credit, allow eligible borrowers to take tax deductions for the interest paid on the loan each year.

These types of loans can help you pay off high-interest debts, or they can be used to purchase new assets like a car or house. Depending on the asset being used as collateral, these loans can also have longer repayment terms than their unsecured counterparts.

For example, First Tech Federal Credit Union offers competitive interest rates on secured personal loans. Rates vary based on whether you’re securing your loan with cash from a savings account, CD or stocks you own. It also doesn’t charge origination, application, refinance or prepayment fees. Regardless of your reason for getting the loan, it’s important to make all your payments on time. This will prevent you from losing your collateral and hurting your credit score.

Tax deductions

There are several tax deductions available for secured loans. Home mortgage interest is an example of one.

Depending on the type of loan and your filing status, you may be able to deduct interest on your mortgage or second mortgage up to a certain amount. The maximum is $750,000 for individuals and $375,000 for married couples filing separately.

You can also deduct interest on home equity loans and lines of credit. However, you must use the money to buy, build or substantially improve your home that serves as collateral for the loan.

Student loan interest is another example of a tax deduction. You can deduct up to $2,500 in interest paid on federal or private student loans used for qualified educational expenses.

This is an above-the-line deduction, which means it’s a deductible item on your tax return rather than an adjustment to your income. It may also help you qualify for other tax benefits or education tax credits.

No collateral required

Secured loans are a popular choice for people who need to borrow money. They typically have lower interest rates and come with more benefits than unsecured loans, such as tax deductions and access to more money.

The main advantage of secured loans is that you can use assets (such as a car, property or cash) as collateral. Collateral increases a lender's comfort level and decreases its risk, which makes it easier for lenders to approve borrowers with less-than-perfect credit.

Whether you're applying for a mortgage, auto loan or personal loan, collateral can make the application process easier and can help you qualify for a lower interest rate.

If you decide to apply for a secured loan, you may want to evaluate what can be used as collateral and how much it would cost you to replace the asset if you were to default on your payments. You can also review your budget before you submit your application to ensure you can afford the loan and that it's a good financial decision for your situation.

Access to credit

Whether you’re looking for money to consolidate credit card debt, fund a home renovation project or buy a car, secured loans offer an alternative to unsecured personal loans. They typically have lower interest rates and are easier to qualify for because they’re backed by collateral, explains Frank.

Secured loans are available through traditional banks, credit unions and online lenders. Before you apply, consider your credit history and budget to determine which type of loan is right for you.

Generally, secured loans are better for building credit and have a higher borrowing limit than unsecured loans. However, they can also come with a high interest rate and are harder to pay off early.