If you are planning to take out a personal loan, then the decision between a secure and unsecured personal loan would be challenging. There are several differences between the two types. The major one is that secured personal loans are backed up by collateral, whereas unsecured ones are not.
To take a secured personal loan, you have to use one of your valuable assets, in order to secure it. Therefore, this type of personal loan is a little easier to get rather than an unsecured one. But if you are a newbie and find all of this a bit confusing; we are here to help you. We have summed up this brief guide to help you understand secured personal loans and how they work. Let’s dig in.
How do Secured Personal Loans Work?
What is a Secured Personal Loan?
Secured loans, as mentioned above, have collateral protection. What does this mean? It simply means that when you apply for a secured personal loan, you will have to utilize a valuable asset of yours, to secure the loan.
The lender holds your asset until the loan is paid back completely. If you are unable to pay the loan on time, the lender has the power to sell your asset to compensate for this loss. Therefore, it is very important to consider the whereabouts of a secured personal loan before opting for it. If you are planning to get a small amount of money to start a business or invest small for any purpose; then a secured loan can be a good choice. However, it is not feasible if you want to borrow a huge amount.
Secured Loans vs Unsecured Loans
Personal loans are segregated into two types, i.e. secured and unsecured loans.
Many people are unable to qualify for unsecured loans, which is why they opt for secured personal loans instead.
The biggest difference between the two is the interest rate. The interest rate of unsecured loans is typically higher than secured ones. Thus, if you are looking for a loan with affordable interest rates then secured personal loans would be suitable for you.
Secondly, the penalties vary a bit too. In secured loans, if you are unable to make the repayment, the lender can sell your assets to compensate for his loss and your credit score also drops. Similarly, in unsecured loans, the credit score drops too but your missed payments are added into the collection.
Types of Secured Personal Loans
Lenders understand the pros and cons of secured personal loans and the power they hold over you. In the worst-case scenario, all they have to do is sell your lien as that is all they have for security purposes.
The assets obviously do not confirm your loyalty towards repayments, but it does bring a sense of security to the lender.
There are different types of secured personal loans too:
- Loan for land
- Auto loans
- Home equity line
- Business loan
You must understand the aspects of all these loans before applying for them. It will help you make a wiser decision for yourself.
Pros and Cons of Secured Loans
For some people, the pros of a secured loan outweigh the cons of it. However, many people do not opt for secured loans as it puts their assets at risk. If you are confused about what to do then here are some quick pros and cons to consider:
Easy to Qualify:
One of the biggest benefits of secured loans is that it is easier to qualify. They are less risky for the lender and thus, they definitely prefer it more. Also, if you are in need of a loan urgently, this might seem like the best bet.
Secured loans are cheaper than others, as they have low-interest rates. You can always negotiate with the lender as you are putting your asset at risk.
Now, this is a huge downside of secured loans; it limits your borrowing capability. If you want to borrow a large amount of money, you will have to put a huge personal asset at risk. Thus, your limitation is justified. This is why, people who want a huge amount, usually opt for unsecured personal loans.
Putting your Assets at Risk:
If you think that you are not too good at repayments and you might end up defaulting on the loan; a secured personal loan might not be a sensible choice for you. If you are unable to make the payments; the lender will simply sell your asset to compensate for his loss.
Weighing out the pros and cons of secured personal loans helps one in making a wise decision. If you are interested in applying for a secured loan, then do your research beforehand and always compare different lenders.