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.
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.
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!