Secured Loan Definition

Secured Loan Definition

You probably know this already, but we’re going to state the obvious for the sake of being on the same page as it were: a secured loan is an exchange of money using tangible collateral as security for the repayment of said loan.

Shorter version: anyone who uses an asset of monetary worth to borrow money has engaged in the transaction known as a secured loan.

Secured loans almost always come with benefits that unsecured loans don’t have, such as lower interest rates and higher borrowing limits. In another article, we asked the hypothetical question about what the “secured” part of the term “secured loans” meant; whether it was about the tangible safety of a loan, or the perceived “safety” from a non-tangible perspective, such as feeling ‘safe.' And the answer is that it’s a little bit of both.

The “Security” in Secured Loans

It may sound odd, the idea that loans need to come with some ‘feeling’ of being secure, but those who know the stock market and the financial history of the United States will readily tell you that the markets succeed and fail based partly on investor’s perceptions. The way some people feel about how markets are doing has a direct effect on how those markets function. It’s what they mean when the financial news publications talk about “investor confidence.”

We’ll give you a few examples of this.

Mark Twain once wrote, “a rumor can get halfway around the world before the truth even gets out of bed.” This is especially true in the volatile world of finance. Have you ever heard of a “run on the bank” (popularized in the classic movie “It’s a Wonderful Life”)? It means that rumor has spread that the bank is in financial trouble, and everyone is rushing to withdraw their money before that institution becomes insoluble (goes out of business).

Unfortunately, as recent history has demonstrated, these rumors are true, and those in charge of the facilities will publicly state everything is fine when it most certainly isn’t (See Enron, for example). This does not mean that an impropriety has taken place (though that was certainly the case with Enron), such as the collapse of financial institutions in 2008.

While there was certainly some amount of reckless loaning procedures, the trend of selling ‘unstable assets’ and taking out enormous loans based on those assets had become an industry-wide practice in the early 2000’s. It wasn’t’ so much that lenders were engaging in predatory practices as it was much easier to get a loan with little or even no collateral. (You may have heard about so-called ‘predatory lending,’ but the real crux of the problem was irresponsible borrowing; thanks to the house-flipping craze, many people were taking out third and fourth mortgages on their homes to buy secondary properties, improve them, and sell them at a profit. It’s also part of the reason the housing market bubbled).

So, once the perception of unstable lending practices came to light, markets began to fail, financial institutions were sold or bailed out. Laws are now tougher, standards are stricter, and getting a loan isn’t nearly as easy as it was ten years ago.

Here’s another example of perception vs. reality. Those of us who are willing to admit being alive during the heady days of the Video Cassette Revolution (VCR…the ‘R’ usually stands for ‘recorder’) will remember there originally were two types of technology being produced. One was called VHS (Video Home System) which was developed by the Victor Company of Japan (JVC), and the other major video recording technology was called Betamax (Beta).

By all objective criteria, Beta was the superior product; better picture and sound, longer lasting, much more durable. Most media outlets used Beta for production purposes. But VHS wound up dominating the market, and primarily drive Betamax out of business. Why? Because rumor got out that Betamax machines were more expensive. While this was technically correct, the “valuable” aspect was – on average – ten to twenty dollars above a comparable VHS machine. All the consumer public heard was “more expensive,” and that’s all it took. Even after Betamax publicly stated they would lower their prices to compete with VHS manufacturers, it didn’t matter; the “more expensive” label stuck to Betamax and nothing could unstick it.

That’s a little bit how financial markets operate. You may have heard something that sounded like this on the news: “The Dow Jones closed down 100 points today amidst investor fears that the American Consumer Mobile Electronics company (ACME) will announce lower than expected profits on their latest quarter earnings statement…”  Sounds familiar, doesn’t it? Check out the key words in just that one sentence: “fears,” “will announce,” “expected” ...none of these are concrete terms and in an ideal world, would not have a place in financial markets. But note how in the hypothetical example (note: you should seriously weigh your options if you ever have the chance to invest in any company called ‘ACME.' According to most coyotes, their roadrunner traps perform to less than desired specifications) talks about fears over actual profits not being as significant as expected.

We could go on and on because, sadly, there are many examples of how perception took precedence over reality, but you get the idea, and hopefully you are aware that roadrunner traps made by ACME do not come with a warranty, and tend to fail often.

So even when a loan backed by tangible collateral is a reasonably safe transaction, there is still the intangible aspect of security that needs to be in place, even if you’re famous. For example, at the time of his death, Michael Jackson was rehearsing for a series of shows that were to be staged to pay his debts because he could no longer secure a loan…that’s arguably the most famous person on the planet, and he could no longer get banks to lend him money.

It’s that intangible part that’s such a mystery to many, including financial experts. The physical aspect is relatively straightforward: if you have an asset that you can use as collateral, then you can secure a loan for an amount that relates to the value of that asset. OK, that’s a little complexly worded. Let’s try another definition. If you have something that’s worth money, you can get a loan for an amount that reflects the value of that something. For instance (and these are just hypothetical examples; these numbers do not reflect reality and are only used because the author is bad at math), if you have a piece of property worth 100 dollars, you can secure a loan for a certain amount of that 100 dollars.

We hope that makes some sense to you as we are hesitant to use any actual figures because there’s always someone who uses an article like this as an authoritative source and then gets into potential trouble. This article is not, and does not reflect definitive financial advice. It is a primer using basic information that hopefully will compel the reader to do further research on the difference between secured and unsecured loans. Please don’t go take out a second mortgage on your house just because you read this article.

Why You Might Need a Secured Loan

Once you understand what a secured loan is, you may find yourself asking why you might need one. The most important question to ask yourself is if you do need one right now. Many people find they can get through tougher times by “tightening the belt” as the saying goes. Make sure you have considered all the reasons you might take out a loan and as we said, do your research. Sometimes people get loans only because they panic when hit with an unexpected financial situation. Make sure you’ve considered all the options and perhaps talk to a trusted friend or adviser before taking out a loan.

That’s right; we don’t want you just to rush out and get a loan at the slightest hint of financial insecurity (or “investor fears”). CASH 1 practices responsible lending, and actively encourages responsible borrowing, and we’re not just saying that. There are practical reasons why we want to keep solid, ongoing relationships with our customers.

Let’s take a worst case scenario: suppose you get loan against your car title (in other words, a secured loan) but you don’t repay the loan itself. This is the last thing anyone wants because the result is a possessed car (and the hassle of selling it), damaged credit, the inability to utilize a secured loan in the future, and a troubled borrower.

With the repayment of the secured loan, the borrower gets to keep the vehicle help their credit, and can take out a secured loan again in the future. That’s not just good for the borrower, but good for the lender as it means repeat business.

But why take out a secured loan in the first place? There are many reasons, of course, and we could spend pages worth of text listing them, but you probably know them already; just about any financial necessity is a good reason to take out a loan, and it doesn’t have to constitute an emergency.

Let’s say you want to sell your house, and you’ve spruced it up nice and tidy so it presents as best it can come sale time. And let’s further say that all you need is a paint job and one or two other minor things to get it ready. You wouldn’t take out a second mortgage to do some minor housework, but if the real estate market is hot, and you want to sell before it starts to cool off again, then maybe you can take out a title loan to get these issues taken care of sooner rather than later.

Quick aside, can you name a type of secured loan that many people don’t even think of as a loan? Here’s a hint: that's how Pawn Shops work.

You could say that’s a micro secured loan, but it’s also a good example of putting up collateral for cash and getting to keep your assets if/when you redeem your pawn ticket.

Second mortgages on homes are generally for large amounts, and banks tend to put a minimum (usually about $20,000) required to borrow. Many people find too much of a hassle (or even a temptation: “I only needed $5,000, but with this second mortgage, I’m going to Hawaii!”)

It’s entirely possible that a secured loan utilizing your vehicle title can provide you with exactly the right amount you need. Without having to worry about the hassle (or the temptation) of handling extra cash, and even dealing with what might seem like a lower interest rate but end up costing you more money.

If you are in a situation that requires an immediate financial response, wouldn’t it be better to get a secured loan based on your vehicle’s title than to try and sell it and hope you find a buyer quickly? A secured loan with your vehicle’s title as collateral can represent a potential convenience in a time of need instead of piling one potentially stressful situation on top of another. And it doesn’t have to be the title of your car. You can use any vehicle as collateral.

Sure, you could go the Craigslist route, but do we even have to link to a story in which a transaction on the famous (and infamous) bartering site went wrong? The ‘security’ in secured loans runs both ways. You get the security of knowing you can get a loan without the feeling of surrendering that vehicle you didn’t want to part with in the first place.

See us at CASH 1 and find out if a secured loan utilizing your car title is right for you.

 

Secure loan definition? If you use an asset of monetary worth for collateral to borrow money, you have engaged in the transaction known as a secured loan.

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