About credits with collateral

What is a secured loan

A secured loan is a loan for which the borrower pledges property to the lender: a flat, house, summer cottage, car, motorcycle or other asset the lender accepts as security. If the borrower stops paying, the lender has the right to sell the collateral and use the proceeds to cover the debt.

Because the lender’s risk is lower, rates on secured loans are usually lower than on unsecured loans, and the amounts and terms are larger. The rate depends less on the value of the collateral itself than on what share of that value the loan represents and how easy the collateral is to sell. A flat in a city is reliable collateral; an old car is much less so, which is why their rates differ considerably.

Mortgages

A mortgage is a loan to buy or build a home, with the property itself as collateral. The bank usually finances not the full value of the home but most of it — typically 80–90% of the valuation. The buyer pays the rest from their own funds as a down payment. The exact share depends on the bank, the country and your situation.

In addition to interest, a mortgage involves one-off costs: the bank’s arrangement fee, property valuation, registration of the mortgage and insurance. The mortgage is recorded in a public property register — in Latvia, this is the land register. Learn more in the article “Mortgages, car loans”; lenders offering mortgages in Latvia are listed in the “Mortgage credits” section.

Car loans and leasing

The collateral for a car loan is the car. Such a loan is taken out to buy a new or used car, and some lenders also lend money against a car you already own. A car loan can often be arranged online. The lender may require a down payment, a valuation of the car and comprehensive (KASKO) insurance.

Leasing is a very common way to finance a car. There are two types:

• Finance lease — essentially a loan to buy a car: until the final payment, the car is registered to the leasing company, and once fully paid it becomes yours.
• Operating lease — a long-term rental: at the end of the term, you return the car or buy it out at its residual value.

You can find lenders offering car loans and leasing in different countries in the “Car loans in Europe” section.

Interest on secured loans

Lenders usually don’t state the rate on a secured loan in advance: it is calculated individually and depends on your credit history, income, the value of the collateral and how easy it is to sell. That is why rates vary widely: they are usually lowest for mortgages and noticeably higher for loans secured on a used car.

You can sometimes negotiate a lower rate or fees — for example, if you are a long-standing customer of the bank or the bank is running a promotion, which often happens when leasing a new car. Compare offers by the annual percentage rate (APR) and the total amount to repay.

Risks of a secured loan

The main risk is losing the pledged property. If you stop paying, the lender has the right to sell the collateral. And if the proceeds are not enough to cover the debt, interest and the costs of the sale, you will usually have to pay the remainder. So be especially careful with loans secured on your home or a car you cannot do without. At the first sign of payment difficulties, contact the lender straight away: you can often agree on a new repayment schedule.

You can find lenders by country in the catalogue: Credits in Latvia, Credits in Europe — North & West and Credits in Europe — South & East.