There are two main categories wherein most if not all loan types fall into. They are secured and unsecured loans. Secured loans are loans that require a security while unsecured loans do not. If you’re choosing between the two main categories, secured loans may be a better option for a number of reasons. Here are some advantages you can enjoy with secured loans:
Larger loan amounts
With the security requirement, borrowers are able to take out larger loan amounts with secured loans as opposed to the meager offerings of unsecured loan providers. In general, you can borrow from £1,000 up to £150,000 or even more. When it comes to meeting a wide variety of financial needs, secured loans win hands down.
This type of financing comes handy for minor financial emergencies such as overdue bills to major financial expenses like medical-related expenses. You can also take out a secured loan to fund a business start-up or for down payment of a new house. If you’re off to vacation and you need cash, you can also rely on secured loans to save the day.
Longer repayment terms
It follows that secured loans come with longer repayment terms. In comparison with unsecured loans, which usually have repayment terms from 12 months up to 36 months, secured loans can be repaid from a year up to 20 years or even longer. You can repay your loan on a monthly basis. Length of loan repayment will depend on how much you intend to borrow and how much you can afford to repay on a monthly basis. Your lender will offer you several repayment options to consider and choose from.
Lower interest rates
Because of the security requirement, the risks are lower on your lender’s end. This also means that cost of your loan will be more affordable than unsecured loans. Take for instance home equity loans. When you borrow this type of loan providing your home equity as collateral, you’ll likely pay less than 10% in interest rate. If you opt for an unsecured loan, on one hand, the interest may be multiple times more costly. This is because unsecured loans are usually offered for borrowers with bad credit. Since there’s no security involved, the risks are higher on the lender hence the costly interest rates.
What are the potential risks?
There’s no question to the fact that secured loans are more affordable than unsecured loans especially if you have a good credit score. But other than the cost, another key consideration to keep in mind is the risks involved. With secured loans, the only high risks you need to consider is repossession. Whether you put your house or vehicle as collateral, your lender now has the right to recover these assets in the event that you are unable to repay the loan. Repossession is often the last resort for lenders. As long as you are paying your dues on time, there’s nothing to worry about.
Are secured loans still better?
Despite the risk of repossession, secure loans remain a better option for borrowers with good credit and who are looking for a low cost loan to meet a wide array of financial needs. The trick is for borrowers to plan their borrowing thoroughly. If you’re going to take out a loan, a secured loan in this case, you need to make sure that you’re only borrowing what you can afford. You also need to commit to repay your loan on time each month. Otherwise, you are putting your credit score as well as your finances at risks. Either you pay a higher interest rates because of late payments or risk repossession because of missed payments.