Secured vs. Unsecured Loans
Borrowing money is a serious responsibility no matter what type of loan you choose. The days of walking into your neighborhood bank or credit union and quickly and easily getting a personal loan are pretty much over.
Since the financial meltdown began in late 2007, traditional lenders such as banks and credit unions have severely tightened their lending requirements making it much more difficult for many consumers to qualify for a loan. Homeowners have also seen the value of their homes greatly decrease since the housing market collapsed a few years ago- so much so that home equity loans are almost non-existent in today's financial market.
However, people still have financial needs and loans are still available. If you have made the decision to apply for a loan, here are some basic facts which you should know.
There are two different types of loans generally offered to consumers: secured and unsecured. A secured loan is a loan which requires some form of collateral from the borrower. For example, this could be your home or your car. An unsecured loan does not require any type of collateral and therefore carries a greater risk for the lender.
Advantages and Disadvantages
Here are some advantages of secured loans:
- Your interest rate (APR) will generally be lower and more affordable than with an unsecured loan.
- Payments are normally spread out over a longer period of time giving you more flexibility with repayment of the loan.
- You can usually borrow larger amounts of money compared to an unsecured loan.
- You may be able to get a secured loan with a less-than-perfect credit history. Since you have to provide collateral for a secured loan, lenders will be assured that they will get their money back even if you default on the loan.
Some disadvantages of secured loans are:
- You are required to pledge specific assets as collateral for the loan.
- If you are unable to make the regular payments and/or default on the loan, the lender has the right to repossess your pledged assets to recover the money which is owed.
- Repayment periods are generally longer than with an unsecured loan meaning you are in debt for a longer time.
The following are advantages of an unsecured loan:
- You can normally qualify for an unsecured loan without having substantial assets.
- Since there is no collateral required, you do not risk losing any personal property such as a home or car.
- Unsecured loans are a better option for consumers who only need to borrow a small amount.
These are some disadvantages of an unsecured loan:
- The repayment period is usually shorter than with a secured loan resulting in higher payment amounts.
- Since there is no collateral required, lenders normally charge higher interest rates for unsecured loans.
- Qualifying for an unsecured loan is generally more difficult.
Ultimately, it is your decision on what type of loan to choose. You should always give careful consideration to your personal circumstances when deciding to take on new debt and always borrow the least amount of money possible.
Things to Consider When You Borrow Money
Borrowing money is a serious decision which deserves your time and consideration. Responsible borrowing can help you achieve certain goals and can improve your lifestyle. Reckless borrowing can cause serious financial problems which can affect your future ability to get a job, buy a home, or obtain any new credit at a reasonable rate.
Here are some important points to consider before committing to any type of loan:
1. Can I afford to repay the loan?
If you have doubts about your ability to repay the loan, do not sign the loan agreement. Don't depend on possible salary increases or bonuses to help make the payments more manageable. If you cannot depend on your current financial situation to repay the loan, do not proceed any further.
2. What are the terms and conditions of the loan?
It is your responsibility to read and review all of the terms and conditions of your loan agreement. Lenders are required by law to disclose to you all of the terms and conditions of your loan in writing before asking you to formally sign the loan contract. Do not sign a contract which contains any blank spaces. If you have any questions or concerns, ask your lender before signing the loan papers.
3. Am I dealing with a reputable company?
Most lenders are reputable but unfortunately there are some unscrupulous ones doing business also. Take the time to research different companies before choosing one to work with. Contact your local Better Business Bureau to see if there are any complaints or lawsuits lodged against a specific lender.
4. Am I borrowing money for something I really need?
Many people have trouble differentiating between a "want" and a "need". Whenever you decide to take on new debt, be certain that it is for something you "need" and not just an impulsive "want". Give yourself plenty of time before making a final decision. More often than not, something you think you need seems less important after a week or so of consideration.