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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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Key questions you need to ask before applying for a loan

Granted, there are a myriad of reasons as to why people apply for loans. There are those who apply for loans to refinance an existing debt, others apply for a loan to buy machinery or buy land while others still want to go for a vacation or simply to finance an upcoming wedding. Whatever the reason for applying for a loan, it’s prudent to do it with your eyes open and from an informed perspective. With so many rogue lenders who find satisfaction in hidden charges and swindling borrowers of their hard earned cash, you cannot afford to be complacent. In that regard, it’s essential that you ask a number of questions prior to applying for any given loan be it secured or unsecured.

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What is my credit score?

The approval or rejection of your loan is largely dependent on your credit score. The higher your credit score, the better the loan terms not to mention ease of approval. On the other hand, the lower your credit score, the more difficult it is to get approval not to mention higher interest rates that will be slapped on your loan if you are approved. It is therefore of the essence to know your credit score status and take measures to improve it prior to applying for a loan.

What is needed in order to be considered for a loan?

The fact of the matter is that there different requirements for different types of loans. On the same wavelength, different lenders have different requirements. For some loans, the income you receive monthly as well as the state of your credit score is enough to get access to a loan. For others, stringent requirements such as copies of tax returns, bank statements, land title deeds, the number of assets you have, among other things, are required before you can be considered for a loan. It is, therefore, important to be know of these things before you set out to apply for a loan.

What is the standard loan application process?

This is a very important question as it gives you an idea of how long it will take before your loan is approved, the period of time before money is reflected in your bank account, what you need to furnish the lender with prior to approval and so on and so forth. Understanding the loan application process gives you an idea of the standard period you will have to wait before you receive cash that you are borrowing.

What is the interest rate applicable to the loan?

The interest rate attached to a loan gives you an idea of the total cost of the loan and how it will affect your finances going forward. It is therefore important that you be familiar with the annual percentage rate (APR) to help you make an informed decision. Generally, a higher APR means the total cost of the loan will be higher as compared to a lower APR. It is therefore important that you put the APR into consideration prior to applying with a given lender.

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What is the period of repayment?

Without a doubt, the loan repayment period is going to affect your budget or rather your finances going forward. It also affects the exact amount of money you will part with on a monthly basis after securing the loan. A long repayment period means you will have lower monthly payments and vice versa. On the downside however, a longer repayment period means that you will be committed to a loan repayment for an extended period of time and therefore pay more interest.

What is the worst case scenario should I be unable to furnish my loan?

You definitely want to know the applicable fees, charges as well as penalties for non-repayment not to mention the inability to pay should the unexpected happen.

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