If you are looking for a loan for a major purchase, debt consolidation, money for your child's education, home renovation and want a higher borrowing amount for a lower interest, a secured loan is definitely the way to go. Secured loans and lines of credit are secured against your assets which allow for higher borrowing amounts and lower interest. As well, if your credit is less than perfect, a lender is more likely to approve your application if they have an asset to use for security.

Since secured loans require collateral, the approval process can be fairly lengthy as the collateral must be processed and verified. This due diligence takes time but the rewards are worth the extra effort and wait as you will benefit from lower interest rates and terms.

Types of Secured Loans

There are several types of secured loans. Mortgages, home equity lines of credit, home equity loan, mortgage refinance, reverse mortgage, automobile loans, automobile title loans and peer-to-peer lending.

There are pros and cons to getting a secured loan. If your credit is less than stellar and you own your home or vehicle, then a lender is more apt to approve your application because they know they have something to repossess should you become delinquent in repaying the loan. With security behind the loan, the lender is willing to offer you better rates and terms.

Mortgages

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Mortgages are one of the largest personal loans that a person may get in their lifetime. It is secured by the home, rental property, vacation home. A mortgage allows for a co-borrower or co-signer, and both are responsible for the mortgage should the primary borrower default. There are many types of mortgages - a fixed rate, variable mortgage, VA mortgage, HARP mortgage etc. All of these regardless of type, are a personal loan secured by real estate. The loan is used solely to purchase real estate and cannot be used for anything else. To find out more about mortgages click here.

Home Equity Loan

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There are many reports as to whether it is better to own your home or to rent. One of the pros of owning your home once you have built up equity is that you can borrow against it. It becomes a home owner's most valuable asset. What is equity? Equity is the difference between what your home is worth and what you owe. Unlike a traditional mortgage, a home equity loan allows you to use the money for whatever you need - debt consolidation, renovations, education, a large purchase or even a second home. The equity secures the amount you borrow, so a lender is more apt to approve you as they can repossess the home should you become delinquent in your monthly payments.

How it works - The Federal Trade Commission (FTC) has set the maximum loan approval a lender can give is 85% of the home's value (including your existing mortgage). Once this calculation is determined and you have met the lenders' criteria, you will receive the money in one lump sum. Home equity loans have fixed rates for the entire term so the borrower knows exactly what the monthly payment will be. The terms for home equity loans can be anywhere from five to 20 years.

Equity Calculations -

  • maximum loan amount - the value of home x 85%
  • maximum loan available - maximum loan amount minus current mortgage owing
  • For example - your home is worth $250,000, you owe $190,000 and are looking for a debt consolidation loan of $20,000 to pay off high-interest credit card balances. First calculation: $250,000 x 85% = $212,500 (maximum loan secured by your home). Second calculation: $212,500 - $190,000 = $22,500 (maximum amount you can borrow as a home equity loan)
  • Fees - because a home equity loan is secured by your property, it may have the same fees as applying for a standard mortgage. These fees could include the application or loan processing fee, the origination (underwriting) fees, lender fees, legal fees, appraisal fees, and title fees. Be sure to talk to the lenders before you sign anything to discuss exactly what fees are charged.

Home Equity Line of Credit (HELOC)

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A home equity line of credit is like having a revolving line of credit secured by the equity in your home - very similar to a credit card. A HELOC falls under the FTC rulings that a lender can only lend up to 85% of the fair market value of your property including the amount that is owing on your existing mortgage. (See calculations under home equity loan). The great thing about a HELOC is that you do not need to take all of the money upfront, but can borrow only as much as you need during the 'Draw Period'. The 'Draw Period' can be anywhere from five to ten years and during that time you only need to pay the monthly interest costs. The 'repayment period' is usually ten to twenty years after the 'draw period' is over. During the repayment period, the borrower begins making interest and principal payments.

  • Interest Rates - the interest rates for a HELOC are usually adjustable / variable rates (prime + one or two points depending on your creditworthiness). If the prime rate is low your interest and principal payments will be low, but should prime increase so will your monthly payments. Be sure to discuss if your HELOC has a periodic cap (the limit that the rate can change during a set time period) and a lifetime cap (limit of the interest rate for the duration of the loan term). If you are not comfortable with this, ask for a fixed rate HELOC, so you know exactly what to expect with the monthly payments during both the draw and repayment periods.
  • Fees - these may include an application fee, an appraisal fee, title search, legal fees and possibly an annual fee to keep the line of credit open.

Mortgage Refinance

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Refinancing your mortgage is when you get a new mortgage to replace your existing mortgage. A person would refinance to get a better interest rate and term. The existing mortgage is paid off and the new mortgage is created. This is also a good time to refinance up to 85% LTV if you are looking to free up extra cash for a home renovation, debt consolidation, education. Rather than multiple loans for multiple reasons, you have one payment with lower interest rates and better terms.

Reverse Mortgage

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A reverse mortgage is a loan secured by the equity in your home and is designated for adults 62 years of age and older. The lender pays the owner an agreed amount every month. For many retired couples a reverse mortgage can supplement their retirement income. The interest is added to the loan balance each month payable at the end of the 'loan'. The borrower does not make monthly mortgage payments but is responsible for the homeowner's insurance and property taxes. Payment is deferred until the time of death, sale or until they move at which time the 'loan' and interest is paid in full. Any remaining equity becomes part of the estate. State laws determine how big the 'loan' can be based on the value of the property, the age of the borrower and current interest rates.

Risks of loans secured by your home

Having the equity in your home to borrow against is a safety net for all homeowners. Some risks come with this type of borrowing, and it is always wise to keep them in mind.

  • Once you have borrowed against the equity, you no longer have that equity as an asset. Your new loan amount is subtracted from the equity you have worked hard to build.
  • If you run into financial difficulty and are unable to make your monthly payments, you risk defaulting on the loan. The lender can then foreclose on your home.
  • If you resell your home, your mortgage and home equity loans must be paid out first
  • the interest on your home equity loan and/or home equity line of credit may be eligible for a tax deduction. Be sure to consult your accountant or tax professional regarding your personal situation.

Auto Title Loan

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A loan taken out to purchase a car is much like a mortgage. The lender uses the vehicle as collateral and maintains control of the title of the vehicle until the loan is paid in full. Should you default on the loan, the lender can seize the car

Often, though consumers with a less than perfect credit score need to borrow money do not qualify through traditional methods. If they own their clear vehicle title, they can then use the vehicle as collateral for the loan. They would sign the title over to an auto loan title company. The loan company would lend up to 25% of the car's value. They would then hang onto the title until the loan was repaid in full. A default in repayments would result in the lender 'seizing' the vehicle.

Title loan amounts average from $100 + depending on the value of the vehicle. Borrowers repay the loan in one lump sum or over a period. Some auto title loan companies will allow the borrower to only make interest payments for an indefinite period until they are in a position to repay the principal amount.

Auto title loan companies target those who cannot borrow money any other way. The annual percentage rates (APR) can be between 100% - 300%. This means that the borrower who is already struggling may never catch up and end up having their auto repossessed. An example is a $2,500 car title loan to be repaid in a 12-month installment with an APR of 150% would make monthly payments of $352.93. At the end of the 12 months, they would have repaid the original loan amount of $2,500 and interest of $5,970.32.

Many states do not allow auto title loans as they are considered predatory lending. These loans target those who can least afford the high-interest rates and fees. Car Title loans are prohibited in more than 20 states. The states that do allow auto title loans impose rate caps

States that Allow Auto Title Loans - Unlike payday loans, the industry of auto title loans is not as strictly regulated. It is up to each state to set their regulations and guidelines. Most states allow auto title loans but put limits on loan amounts and interest charged. Auto Title loans are legal in Alabama, Arizona, California, Delaware, Georgia, Idaho, Illinois, Louisiana, Mississippi, Missouri, Nevada, New Hampshire, New Mexico, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, and Wisconsin. Each state sets the loan amount if any, minimum term for repayment and maximum interest that can be charged.

Promoting auto title loans does not help those who are in a desperate position financially. Our recommendation would be to borrow from a family member before looking for this type of loan.

Lending Criteria for a secured loan

  • Home Equity and HELOC
    • enough equity to borrow against without going over 85% LTV
    • credit score of 650 + 
    • hard credit inquiry to determine credit history and usage
    • maximum DTI (Debt To Income) of 43%
    • strong cash flow to support existing mortgage and new loan
  • Auto Title Loan
    • must have proof car title
    • proof of ID
    • vehicle value assessment by lender

Credit Report Inquiries

The Federal Trade Commission (FTC)* encourages consumers to shop around to compare loan plans with all lending institutions. The FTC wants you to get the best possible loan and terms. The problem is that every lender you apply or talk to will do a 'hard inquiry' on your credit report. A hard inquiry shows all other lenders that you are 'shopping.' It used to be that every hard inquiry made on your credit report lowered your score by up to 5 points if you were not approved or chose not to accept the terms being offered. Shopping was detrimental to your credit score and credit history. FICO (Fair Isaac Corporations)* determined that when a consumer was looking for a mortgage, home equity loan, auto or student loan that they would ignore all inquiries made within a 30 - 45 day period for one loan type and consider it as only 'one' inquiry. This then gives you the freedom to find the best loan and terms without harming your credit. (* see references)

Peer-to-Peer (P2P) Secured Loans

P2P lending is when a private individual loans his personal money to another private individual. P2P loans have started to gain popularity over the last 12 years for both secured and unsecured loans.  A Price Waterhouse Coopers report estimates that by 2025 the P2P platform could lend over $150 billion.

When the P2P loan is secured by residential property, the P2P lender likes to take the first position on title. If there is already an existing mortgage on the title, the P2P loan becomes much riskier to the lender to take on. For example, should the borrower default on the original mortgage, the P2P lender is then obligated to pay the existing mortgage payment if he doesn't want it to go into default. If the existing mortgage holder does not notify the P2P lender that payments are in default, the P2P lender is in risk of losing the entire loan. Lenders that are in first place on title must be paid on first should the property go into foreclosure. Quite often after fees and legal charges there is very little left to pay off the P2P lender.

Loans secured by real estate are known as 'First Trust Deed Investing'. This means that the lender is a private money source and has secured the loan with a 'Trust Deed'. The Trust Deed is filed at the County Recorder's office demonstrating legal proof that the property secures the loan. Once this document is filed, it gives notice to all other potential secured lenders that a debt exists on the property. It also insures the P2P lender that should the property be sold; they will be paid out first from the proceeds of the sale. There are private individuals and companies that will lend money and take a "second" position on the title, their fees and interest rates would reflect the risk.

Typically the lending criteria for P2P lending is less strict than traditional lenders as the P2P's main concern is being 'first' on the title. They may do a 'soft inquiry' on your credit and ask for proof of employment to insure repayment of the loan. The assurance they have is that if you default, they can foreclose on the property.

Online P2P Lending Companies

These companies make it very easy for lending and borrowing money between private individuals. Reasonable interest rates and simplified applications make this very appealing to those individuals who have less than stellar credit and need the funds fairly quickly.

P2P Lending Terms and Conditions

Terms and conditions will vary by individual lender. Interest rates vary from 5.99% - 35.99% and terms are usually between 3 - 5 years. Origination fees vary per lender and amount of the loan.

Secured Loan Lenders

Lending Tree - Mortgage

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Quick Snapshot

Loan Amounts: $100,000+

Credit Score:500+

APR: 3.5 to 7.5

Terms: 5 years to 30 years

Fees: Closing fees, legal fees, and prepayment fees

Lending Tree Benefits

  • Debt to income maximum of 40%
  • Minimum of 5 free loan offers
  • One of the largest online marketplace lenders

Lending Tree - Home Equity Loan

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Loan Amounts: $20,000+ up to 80% LTV

Credit Score: 580+

APR: 4.09 - 12.0%

Fees: Closing fees, legal fees, appraisals

Lending Tree Benefits

  • Debt to income maximum of 45%
  • Minimum of 5 free loan offers
  • One of the largest online marketplace lenders

Lending Tree - Home Equity Line of Credit (HELOC)

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Loan Amounts: $25,000+ up to 80% LTV

Credit Score: 650+

APR: 4.09 - 12.0% Adjustable Rate Cap

Fees: Closing fees, legal fees, appraisals

Lending Tree Benefits

  • Debt to income maximum of 45%
  • Some lenders may loan up to 90% LTV with qualifications
  • Minimum of 5 free loan offers
  • One of the largest online marketplace lenders

Lending Tree - Secured Loan - Mortgage Refinance

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Loan Amounts: $100,000

Credit Score: 580+

APR: 3.80 - 4.85 Fixed and Variable

Fees: Closing fees, legal fees, appraisals

Lending Tree Benefits

  • Debt to income maximum of 40%
  • Minimum of 5 free loan offers
  • One of the largest online marketplace lenders

Lending Tree - Secured Loan - Reverse Mortgage

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Loan Amounts: $10,000+

Credit Score: 500+

APR: Interest rates are charged monthly but deferred to end of term

Fees: Fees can be financed with the reverse mortgage

Lending Tree Benefits

  • 62 + years of age
  • Minimum of 5 free loan offers
  • One of the largest online marketplace lenders

Lending Tree - Auto Loan, Lease Buyout, and Vehicle Refinance

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Quick Snapshot

Loan Amounts: $10,000+

Credit Score: 500+

APR: Interest rates are charged monthly but deferred to the end of term

Fees: Fees can be financed with the reverse mortgage

Lending Tree Benefits

  • 62 + years of age
  • Minimum of 5 free loan offers
  • One of the largest online marketplace lenders
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  1. Federal Trade Commission - Home Equity Loans - FTC - Secured Home Equity Loans
  2. Types of Mortgage Loans - Types of Mortages Pros and Cons
  3. FICO Credit Checks & Inquiries - FICO Credit Checks & Inquiries