Home Equity Loans 101

A secured home loan differs from an unsecured loan in thatthe secured loan borrows against one's home as collateral,thereby reducing the risk to the lender.

As such, secured home loans often offer better interestrates than unsecured loans, but offer higher risk to theborrower, as defaulting on these loans can have greaterconsequences, such as fines, or even possible repossessionof the home originally put up as the secured collateral(subject to the amount of the loan, of course).

As the interest rates for secured home loans are usuallysignificantly lower than unsecured loans, more of themonthly payment goes towards paying off the capital, ratherthan paying the accrued interest.

The monthly payments are often more flexible in securedloans, affording the borrower more leeway in working out apayment plan that fits his or her needs. However, caremust be taken not to use this as justification for takingout such a loan, as it is a financial contract betweenlender and borrower.

There can be a number of reasons for taking out a securedloan, such as debt consolidation of high-interest loans,financing for remodeling, or repayment of college or carloans. Most lenders offering these types of loansrecommend loan repayment insurance, to guard against aninability to pay on the loan for a time due to factors suchas illness, losing a job or other unexpected occurrences.

Before taking on a substantial loan such as a secured homeloan, a careful analysis of personal finances is in order. Having a friend or an accountant or finance officer assistin this process can save trouble and headaches later, asthey may bring up issues and/or expenditures unthought-of,issues such as examining how much is spent on morningmochas at a favorite coffee shop? An outside perspectivecan often help clarify these matters so a better-informeddecision can be made.

If proper planning and care is taken, a secured home loancan be a valuable tool for managing personal debt. Talkingto a loan officer or financial advisor at a major lendinginstitution can help make these possibilities a reality,and can be a step towards the realization of financialfreedom.

Frank Kelly is a freelance writer. Years ago he was anemployee who regularly used payday loans to get thro themonth. Then he disocvered the better alternative of a homeequity loan.

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