What are the Pros and Cons of a Secured Loan?

Secured loans are those personal loans for which you require a collateral to secure your transaction. This is just one option though and you can find several other types of personal loans if you’re not a homeowner or do not want to put up a portion of your property.

Secured loans are an alternative when you do not have a credit history and score to be eligible. But what many don’t realize is that this form of personal financing is not free of risks. The secured loans UK go out in thousands every year yet we see people unaware of what risks they are taking.

Here is a helpful and detailed list of the pros and cons of a secured loan for you:

Pros of a Secured Loan

Great Credit Scored Don’t Matter

For starters, you don’t require a typically high credit score to get your secured loan. Yes, a bad credit history may pose certain difficulties in securing the loan but you will find several lenders in the market, who specialize in the business of financing those with poor credit records. So even with a poor credit score, you can get some financial help.

The other good thing is that even if you have bad score, you have better chances of gaining a secured loan instead of an in unsecured loan. Do you why you can enjoy this feature in a secured loan? It is because the lenders rest assured that they can offset a significant amount of the risk by securing your loan against your property.

In case you fail to make your loan repayments, the lenders can always take hold of your property to reclaim their funds.

Variety of Lenders

You can get a secured loan from a variety of lenders, including online lenders, credit unions and banks. With this facility, you can explore a host of lenders to compare their repayment terms, fees and rates etc.

You Get a Larger Sum at a Lower Interest Rate

When it comes to lenders and how they feel for secured loans, evidence so far suggests that they typically feel more confident lending out larger sums at lower interest rates. Perhaps the reason remains that they face a lesser risk in a secured loan because they know they can always reclaim their money against the person’s property.

Secondly, it is also possible to get a larger sum from your secured loan if you possess more equity in your property. So borrowing more money at better rates is possible in this situation. You can calculate your equity by deducting the remainder of your mortgage balance from your property’s value.

Eligibility Pathway

With a secured loan, you become eligible to borrow money. You wouldn’t possibly qualify for a personal loan otherwise if you did not have a great credit score or history.

Builds Credit Score

You may get a secured loan even with a bad credit score but once you’ve received it, make sure to benefit from it. You can build your credit score quite well if you maintain timely payments. The process will certainly not be easy and you will have to exercise extreme patience while giving it time, especially if you have started out with a negative credit score.

However, the best part is that once you’ve persevered, you will reap great harvests in the long run and be able to avail more credit options in the future.

Longer Time for Payments

With secured loans, you can make your monthly payments more affordable by spreading the entire cost over a longer time period. Furthermore, if you consolidate your debts, you will then not have to juggle several payments anymore and instead, just make one monthly payment.

Cons of a Secured Loan

Financial Difficulties Later

Initially, borrowing larger sums at lower interest rates might sound very appealing but if you borrow more than you need and can pay back, you will suffer later. Initially, the entire ten thousand pounds might be too irresistible but once you struggle to start paying it all back, you will fall into an even deep financial trap.

Loss of Collateral

A secured loan means when you have to put up a collateral to receive the sum you desire. The collateral is usually a hefty asset, most likely your own house. What happens when you fail to make payments beyond thirty days? You will end up losing your most valuable asset, the roof over your head.

Homeownership and Equity

The first requisite of eligibility for a secured loan is to be a homeowner and to have equity to your name. In fact, not just any equity: you should have enough in it to cover for the entire amount you wish to borrow.

Funds may fall short

When you start paying off the monthly bill for your secured loan, you may very likely find yourself short of cash for other necessary expenses. Like we said, the initial amount may blind you the deeper debt spirals you could fall into later.

You may have to settle for Less Competitive Rates

If you’ve got a bad credit score, you may not get to enjoy competitive rates at all. While financing is still available even for those with bad credit scores, no one can deny the fact that the higher the credit scores, the better rates the lenders offer you.

Even when it comes to accepting your loan, lenders will certainly review your previous credit history. If they find your credit behavior unstable, they will not regard you as a reliable or low-risk borrower.

Paying more interest

You can spread payments over a longer time period to make them more affordable but do you know the repercussions of doing that? As a result of doing that, you could end up paying even more in the form of interests

Final Thoughts

A secured loan is a sound borrowing option but it can have its advantages and disadvantages. Before you apply for a secured loan, you must review your financial status, the impact of your credit score on the deal the lenders will offer you and how much you improve or worsen financially once you start making the monthly payments on your secured loan. After all, it is your huge collateral at stake and thus, you must take every step cautiously in a secured loan form of financing.






Share This:

Share on facebook
Share on twitter
Share on linkedin