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Tag: collateral

A sneak peek into the pros and cons of secured car loans

A secured loan simply refers to a loan instrument where collateral is needed prior to loan approval. In essence, when we are talking about a secured car loan, we simply mean that the borrower must set up their car as collateral or any other asset prior to being approved for a loan. The lender can seize or repossess the car and sell it off should the borrower default on loan repayment. While the idea of losing one’s car in case of default doesn’t sit well with most people, the truth of the matter is that a secured loan isn’t as bad as many might want to believe. With that said, what are the merits of a secured car loan and why should a person consider applying for a secured car loan?

Interest rates are slightly lower compared to unsecured loans

The thing about secured loans is that it greatly reduces the risk on the part of the lenders and as a result, they tend to apply lower interest rates. The security gives lenders the guarantee of money back should the borrower be unable to meet loan obligations.

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Flexible requirements as well as flexible rules

Granted that the lender has guarantee in case of a default and in full understanding of the fact that risk is greatly minimised, lenders tend to relax requirements prior to approval of a loan. A requirement such as the need to have an excellent credit score might be overlooked if the borrower sets up collateral. What this essentially means is that you might be approved for a loan even if your salary is not that high because you have provided the lender with something to fall back on should you be unable to furnish your loan.

Cheap monthly repayments

The provision of security means that a person will be able to enjoy cheaper monthly payments because of the risk reduction on the part of the lender. In case of default, the lender can always seize the asset pledged as security and recoup their money.

Low credit score individuals can still apply and get approved for this kind of loan

In the absence of collateral, getting approved for a loan when someone has a low credit score is an uphill task. In fact, most lenders rarely look at applications emanating from bad credit individuals twice. However, with secured loans, the playing field is levelled as even those with a low credit score can apply and get approved provided that they have collateral to pledge.

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And what are the cons or demerits of secured loans?

For one, let’s not beat around the bush. The reality of the matter is that you stand to lose your asset should you be unable to repay your loan as set out in the contract with your lender. Secondly, your credit score will suffer a beating should you miss payments on a number of occasions!

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Unsecured vs. secured loans – which one should you go for?

When seeking to obtain a loan, one thing that is for sure is that you will have to choose between a secured loan and unsecured loan. In fact, all different types of loans are categorised into two broad categories – unsecured loans and secured loans. The most outstanding difference between a secured loan and an unsecured loan boils down to interest rates. Generally, unsecured loans attract higher interest rates as compared to secured loans. The reason behind this is because unsecured loans are considered risky by lenders due to the absence of collateral and therefore to mitigate the risks, high-interest rates suffice.

Secured loans

From the sound of the name, secured loans generally mean that you have to pledge an asset before you can be considered for the loan. In simple terms, you borrow money against the value of the asset you pledge as security. In other words, lenders are more likely to approve your loan when you pledge an asset as security even if you have a poor credit rating. Given the fact that there is collateral involved, secured loans tend to be relatively cheaper when compared to unsecured loans. On the other hand, you stand to lose the asset you pledged as security should you be unable to repay your loan. In other words, you can lose your home, your jewellery, or even your land should you be unable to repay your secured loan.

Unsecured loans

As the name implies, this is a loan instrument that does not require pledging any asset as security. Unsecured loans have a short-term repayment period as compared to secured loans and tend to be more expensive compared as well. Lenders tend to charge high interest rates as a way of cushioning themselves in the event that the borrower fails to repay the loan as earlier agreed. The best example of an unsecured loan are payday loans where a person is required to fully repay the loan on the next payday.

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Circumstances under which you should go for either secured or unsecured loans

If you are thinking of applying for a loan, you probably are in a dilemma as to whether to go for a secured or unsecured loan. Well, if you only need a small amount of money that is repayable within a couple of months, it would be foolhardy to go for secured loans. Simply put, it is not prudent to risk your home or even your car over a small sum of money by going for a secured loan. On the other hand, if you need a huge sum of money for say business expansion purposes or to buy machinery, going for secured loans would be the perfect thing to do. Unsecured loans offer relatively small sums of money as compared to secured loans while the interest rates are also very high. Secured loans will give you the much-needed money at affordable rates and a prolonged repayment period.

In conclusion, it is important to be prudent when choosing a lender irrespective of whether you want a secured or an unsecured loan. Choose a reputable lender that adheres to a professional code of conduct, offers affordable interest rates and is genuinely concerned with the welfare of its customers!

 

 

 

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