What Determines The Cost Of A Secured Loan?

USDA business loans

Two types of loans are available for people seeking financial assistance. These are secured loans and unsecured loans. The main difference between these loans is what you need to give the financial institution to receive them. The unsecured loan does not require any collateral. Therefore, it is possible to get these loans with minimal documentation. Often, unsecured loans will have high interest rates and be short term in nature.

On the other hand, a secured loan requires collateral to be issued. This collateral acts as security in case of default. It means that if there is non-payment of the loan, the lender can liquify the security to recover their money. In comparison to unsecured loans, secured loans allow for borrowing higher amounts of money and have more extended repayment periods. 

Critical Requirements of Getting a Secured Loan

Borrowers who want to get a secured loan face monetary and time costs. These include the following: –

  • Application Fee – The best secured loans will require you to pay an application or processing fee to kick off the application process. This is to ensure that all the necessary checks can be done to get the best terms.
  • Appraisal Fee – For large assets, especially homes, lenders need to determine the actual value of the assets. This requires an independent appraisal where a company is hired to carry out the process. The cost of an appraisal is the borrower’s responsibility and can have a significant effect on the loan amount. 
  • Underwriting Fee – A considerable amount of documentation is submitted when you seek to get an unsecured loan. The lender caters for the costs of putting the documentation together by charging an underwriting fee. This fee also goes towards document authentication so that there is a clear risk outlook for the loan. 
  • Getting Loan Approval – Borrowers need to maintain a good credit history. The credit score will determine the overall interest rate and may affect repayment time. This costs time as a hard credit check is undertaken to ensure that the borrower can afford the loan. If you seek a secured loan, consider that it will take longer to process than the alternative.
  • Origination Fee – The process of facilitating the loan may include a range of different companies and brokers. This is a fee charged to ensure that they receive their due compensation. The best secured loans are given out after all the bases are covered. The benefit of this fee is that the charge only applies once the loan process is complete and the loan has been approved.
  • Asset or Surety – The secured loan will only be issued when a secured debt instrument is in place. Depending on the reason for the loan, the collateral may sometimes be the item being financed. Having security means that these loans are typically easier to obtain. For the lender, they have a lower risk.
  • Insurance – When the risk is shared between parties, insurance is necessary to protect against potential damage or destruction. The insurance usually is at the cost of the borrower. For example, the borrower will need to take out homeowners insurance with a home. This allows the lender to recover their costs if necessary.
  • The Term of the Loan – The duration of the loan also impacts the cost of the loan. The exact amount you will have to pay each month is determined using a loan calculator. Typically, the financial institution will define their terms as to how they shall apply the interest rates over time.
  • Tax Deductions – Before you decide which type of secured loan you want to take out, you may embark on a cost-benefit analysis. The best secured loans will allow for tax deductions on your pay interest. This is often capped at a specific amount and is ordinarily applicable for home equity loans.
  • Flexibility – One of the things you give up when you choose a secured loan is flexibility. The alternative, which is unsecured loans, give you the freedom to spend the money that you receive as you so wish. However, secured loans require you to pay the funds for a pre-determined purpose. This is because the collateral is often linked to the reason you took out the loan.
  • Prepayment Penalties – Once you have received the loan, your financial status may improve, bringing in the instinct to pay off the loan early. Typically, borrowers believe that doing so will save you some of the interest owed. Therefore, it is essential to determine whether the borrower makes this possible. In some cases, a penalty may be charged for making more significant payments against the loan terms.
  • Service Charges – Most secured loans have a monthly service charge to cover the cost of processing and tracking. This fee is typically small but necessary to note as it will form part of your monthly payment.

Many factors affect the cost of a loan. In addition, you will find that a range of fees needs to be settled for the loan to be approved. It is important to note that the best secured loans are not free. Before you decide on a specific loan, make sure to research and discover all the potential costs. You can then decide whether the loan you want to take out is viable and affordable.

About Mohit Tater

Mohit is the co-founder and editor of Entrepreneurship Life, a place where entrepreneurs, start-ups, and business owners can find wide ranging information, advice, resources, and tools for starting, running, and growing their businesses.