Are Secured Loans Better Than Unsecured Loans?
To get right to the crux of this question and answer it, the answer to the question are secured loans better than unsecured loans, they can be.
How is that for a non-committed answer.
There are many different types of loans available to borrowers, and each loan type may have a specific purpose, or fit a certain borrowing need.
However, even in the many types of loans available to us as borrowers, all these loans fall into one of two categories; secured or unsecured.
Without belabouring these two types of loans, it can be easily broken down to secured loans have collateral securing them, something that is physically used to secure the loan, where as unsecured loans do not have anything as collateral.
Almost anything of value can be used to secure a loan, usually we think of a mortgage loan when we think of secured loans. The mortgage (loan), is secured by the property.
If you fail to pay the mortgage, the property which is the collateral, can be repossessed.
Repossession, or the taking back of something you bought using the borrowed money (loan), is a strong motivator to not miss any payments.
And lenders know this as well.
Lenders know and track default rates, and secured loans, for the most part, have lower default rates and fewer missed payments.
So if secured loans appear to be a good thing for lenders, do they pass on these favourable aspects to us as borrowers?
Benefits of Secured Loans
As mentioned, each type of loan has it strong points, and is good for a specific reason or purpose. So there are benefits to each and every form of loan.
Payday loans are easy to apply for and be approved for, so they are quick, and don’t require perfect credit.
Guarantor loans are quick and easy to apply for, and also do not require good or perfect credit, however, you can borrow more money, and pay it back over a longer period of time, making them affordable.
Both these types of loans have benefits, and fit a specific need.
Secured loans are no different, they fit a need, and have benefits.
A secured loan as we mentioned poses less risk to a lender, so what do they offer us as borrowers in return, as a benefit?
* Lower Interest Rates: In most instances, a secured loan is going to have a lower interest rate or APR/annual percentage rate, then an unsecured loan.
Since secured loans are less risk to a lender, they can charge a lower or reduced interest rate. Unsecured loans being a higher risk, will carry a higher interest rate.
* Extended Terms: The term of a loan is how long you are borrowing the money for and repaying the loan. Many unsecured loans may have terms of 12 months, 36 months, even 60 months (5 years).
Secured loans can carry short terms such as these, but they can also have extended terms up to 10 years, or even longer depending on the type of loan and the loan amount.
Mortgage loans can be for up to 20 years or longer. In America some mortgage loans go for up to 40 years!
By extending the term of a loan, it reduces the payments. It also can increase the amount of interest you pay, as you are paying the loan over a longer period of time, but if the interest rate is lower, due to being a secured loan, it can offset some of this.
So depending on what the loan is for, what you have or collateral, and your particular circumstance, some secured loans may work out better than an unsecured loan. However, there are caveats to this as well, such as:
* Do you qualify for the secured loan?
* Your credit score and credit history.
* What is the collateral for the loan?
In the example of a mortgage loan, the property is the collateral, which is an investment, and the terms are longer due to the amount being borrowed.
In the example of a car loan, the car is the collateral, but cars do not appreciate as property does, and also the terms are not as long.
You would need to balance the interest rate and term of a loan to see if getting a personal loan to buy a car may be a better deal.
One thing that must be mentioned when discussing secured loans, if you fail to make the payments, the item used as collateral can be repossessed.
With an unsecured loan, if there is a default, there is nothing to take back or repossess.
In addition, unsecured loans can be included in debt management plans, and also insolvency options such as bankruptcy. Secured loans cannot be included.