Loans are one of the most available instruments for those who want ready cash. But keep in mind that the loan you choose matters a lot. Among the common financing options, we have secured loans. Secured loans are one of the common financing choices you can consider. Often, individuals will choose the secured loan if they need huge sums of money fast and when they are in urgent situations. Also, the collateral used to avail a secured loan varies. You can either use your house, cars, etc. Today, most companies can offer secured loans either online or offline. But, despite the process being simple, you also need to understand how secured loans work before applying. You may also find secured short-term loans, which are granted mostly to business owners.
To help you make an informed decision whether a secured loan is the right option, get to learn these pros and cons and what you may look for before you take out the loan. Let’s dive into it.
Meaning of Secured Loans
A secured loan is a type of loan that requires an individual to provide an asset before getting the loan. This asset will be used as a security for the debt. So, this is a collateral backed up loan. However, the amount of loan one can get is always equated to the value of the asset. Therefore, during the application process, the lender will ascertain the value of the asset to approximate the amount to lend you.
Pros of Secured Loans
Secured loans come with various benefits. So, if you are thinking of taking it, make sure you understand their pros. Here are the pros of secured loans:
You can borrow large amounts of money
The amount of money you can borrow is usually higher because the value of the asset used as a collateral is obviously large as well. Lenders do not accept assets of lesser value when you need to take a loan from them. This is because most borrowers may end up not repaying the loan. Besides, the amount you get will also be equal to the value of the asset. Due to the large amounts, the borrower may be granted additional financial options. Most secured loans don’t have a limit. An individual can borrow as much as the value of their asset allows and their affordability. The higher the value of the asset, the larger the loan amount.
The tenure can be shorter or longer
Another perk of secured loans is their flexibility in tenure. The longer the tenure, the higher, the more you will have to pay. With secured loans, you can choose the tenure that suits you. But, with a shorter tenure, it does not imply that you will have the pay back the loan in months like an unsecured loan. Often, the tenure for secured loans can range from 5 years to about 20 years or even more. But remember, the repayment term shouldn’t take you past your age of retirement. Taking out a secured loan is a longer commitment. However, it is possible to reduce your repayment tenure by increasing the monthly repayments to allow you to finish the loan earlier.
The interest rates are low
The total cost of the loan is determined by the interest rate. Normally, a lower interest will make the cost to be slightly lower than when the rate is high. Secured loans are beneficial in terms of interest rates because the rates associated with such loans are very low. Most lenders usually offer low internet rates on secured loans because they are not risky. With lower rates, you have a wiggle room to handle other financial matters as you will be saving on the costs.
Can boost your credit score
A secured loan is an ideal financial product because it can greatly improve your credit score. Regularly paying the loan without missing a single payment will be reflected in your report, boosting the score. It will also show that you are an honest and trustable borrower.
If the main purpose of taking out a secured loan is to consolidate some of your unsecured debts, you’ll also have a positive review of your credit utilization. Besides, if you are using the loan to add the limit on your credit card debts, it will reflect in your score and lead to a positive result.
Secured loans are easy to be approved
Even if you have imperfect credit, you can still be lucky and get approved for a secured loan. This is all possible because a secured loan is secured by an asset. Lenders will be willing to overlook the credit issues if there’s collateral to act as a backup in case of a loan default.
Cons of Secured Loans
Despite secured loans having the perks, they also come with disadvantages, as stated below:
Longer application process
Getting a secured loan is a very serious matter, as proper planning is needed during the application process to get approved. The lending institutions need to thoroughly check if the collateral you are offering for the loan meets the requirements. Therefore, it is best to apply for a secured loan earlier in case you need money at a certain time.
Your property is at risk if you fail to fully pay the loan
As said, secured loans are backed up by collateral, which means the risk falls on the borrower’s shoulders. In case a borrower fails to complete the loan repayment, the collateral will be used to pay back. Not only that, but also your credit score is affected.
You will pay more with a long-tenure
Secured loans come with a longer tenure for long repayment. Many can rejoice, but it means you are paying more. Though you will be paying smaller monthly payments, which is, of course, good for your salary, in the long run, you are just paying more. Therefore, with a longer tenure, more is paid.
In a Nutshell
Secured loans are valuable instruments for those who are stranded financially. Not only are they available with larger amounts, low rates, and easy approval, but they can also boost your score significantly. However, they can also be costly due to their long tenure, and you risk your property if you fail to keep up with the payments. Besides, the application process is very long, which makes instant personal loans online a viable option if you want instant loan approval and an easier application.
