Unsecured loans are a strong financial tool, with no collateral requirement. But there’s only so much you can borrow with them. If you’re looking to borrow a substantial amount of money to launch a venture, you may resort to a secured loan. Understand when secured loans are a better credit option and weigh the pros and cons to make an informed decision. ⭐Personal Finance ⭐Secured Loans ⭐Money Management
Unsecured loans are a great way to secure money to cater to smaller, urgent expenses. But what if you need a large amount of money, perhaps to fund your business? Unsecured loans typically lend up to £35000, which may not be sufficient for your venture. That’s when secured loans come into play. You can borrow a larger sum of money at comparably low-interest rates with a secured loan.
But when are secured loans the ideal option? Read on to find out.
What are secured loans?
Secured loans or secured personal loans require collateral security. Hence, a fundamental pre-requisite for borrowing a secured loan is an asset’s requirement – a car, a property or a piece of land. Secured loans tend to have low-interest rates because they pose a lower risk to the lender than unsecured loans. In case you default on the loan, the lender could recuperate their loss by repossessing your asset. So be extra careful with repayments.
People who opt for secured loans are generally looking to borrow a sizeable amount of money, something an unsecured loan may not be able to fulfil. You may not be able to borrow hundreds of thousands of dollars without collateral. So a secured loan makes credit more accessible to you. Moreover, secured loans allow you to pay an upfront cash deposit which can do a huge favor to your credit score in case unsecured credit isn’t an option.
What type of secured loans can I borrow?
Collateral gives an edge to the lender once you walk away with their money. Hypothecation reinstates the lender’s leverage – in the worst-case scenario, they’ll be able to repossess your asset. Here are some secured loans that you may consider:
- Mortgage: A mortgage is a secured loan that you can use to buy a property. This property acts as collateral against the loan. Mortgages usually have a longer loan term due to the size of the loan amount. Although if you fail to repay this loan, your home may be seized and repossessed.
- HELOC: Home Equity Line of Credit or HELOC is a form of revolving credit, secured against your equity in the property. The lender agrees to lend you a specific lump sum based on your equity. You can use this money at your discretion. Plus, you will only have to pay interest on the money that you use. HELOC allows you to borrow a relatively hefty sum of money at low-interest rates. But you should be careful with repayments since the lender can foreclose the property if you fail to keep up.
- Home Equity Loan: Home equity loan is a secured credit backed by your equity in the property. This form of credit, too, allows you to borrow a considerable amount of money at low-interest rates. Since you put up your equity in the property as collateral, you must keep up with the loan’s payments. Or else, you could lose the possession of your home to the lender.
- Auto Loans: Auto loans to cars are what mortgages are to properties. You can finance the purchase of your new vehicle with an auto loan. Herein, the vehicle that you purchase will serve as collateral against the loan. It is best to keep up with your auto loan repayments to prevent your car from getting seized by the lender.
- Business Loans: Setting up a business is not a piece of cake. It’s not just about the business idea, but also the implementation and execution of this idea. Since business ventures require substantial capital, you may consider a business loan to finance your venture. You can use it to buy equipment, buy/rent an office space, build your inventory, or pay the human resource. Business loans, too, are backed by collateral. You may use your inventory, technical paraphernalia or office as collateral to secure this loan.
How do secured loans affect my credit score?
If used responsibly, secured loans can help your credit score blossom. Lenders always assess your creditworthiness before approving your loan application. It may be smarter to self-assess before applying. Furthermore, credit checks tend to harm your credit score, so leave healthy gaps between your applications.
Once your repayment period begins, you’ll have to repay the loan along with interest via monthly instalments. Lenders report your entire payment history to one or more of the three major credit bureaus – Experian, TransUnion and Equifax. Where each timely repayment boosts your score, negative information such as collections, defaults, foreclosures, and CCJs can significantly bring it down.
Repaying secured loans on time can certainly help you build credit. And using secured loans like HELOC or home equity loan for debt consolidation can help you improve your credit score by reducing your credit utilization ratio.
Both secured and unsecured loans, if utilized sensibly can bring balance into your financial life. Loans can be the keys to affordable asset building, easing your financial burden through the convenience of small monthly repayments. All you need to do is borrow judiciously, use the funds responsibly and repay the money on time.
When are secured loans an ideal option?
Secured loans can solve a multitude of purposes. Whether you want to consolidate your debt, plan a home improvement project or set up a business, a secured loan can help you solve your money woes. Here’s when resorting to a secured loan may yield better results:
- Large loan amount: Secured loans can help you borrow a considerable amount of money, usually more than £35,000. Besides, you can avail a secured loan at lower interest rates. Since these loans are backed by collateral, they pose less risk for the lender. So, if you’re planning to renovate your home or consolidate high-interest debt, you may use a secured loan (HELOC, Home equity loan).
- Extended repayment period: Secured loans have a lengthier loan term. Stretching it out for a prolonged period can effectively reduce your monthly instalments, making repayment affordable. But remember that you’ll have to pay interest on each monthly instalment. So the longer you take to repay, the more you’ll end up paying towards interest.
- Access to credit: Offering collateral is a crucial pre-requisite for getting a secured loan. As long as you’re able to provide collateral, you may be able to apply for a secured loan even with below-average credit. People with no credit history may also apply for a secured loan. However, you may not qualify for competitive interest rates with poor credit or no credit history.
A secured loan can help you bridge the gap between your dreams and their fulfilment. But, like other forms of credit, secured loans, too, have a set of risks associated with them. The only difference is that they are riskier for the borrower than the lender. It is imperative to run a thorough research and compare your loan offers to find the most suitable loan.
Before you start shopping for loans, ask yourself these questions:
- Can I afford the desired loan amount?
- Is this the cheapest option available?
- Will I be able to commit to the monthly repayments?
- Is my credit score in good shape?
- What will be the repercussions if I default?
A good way to start your borrowing journey is by creating a generalized repayment budget. Incorporating your repayments into the budget will help you stay a step ahead and lower the chances of default. Keeping up with repayments for a secured loan is crucial because you may lose possession of your asset – perhaps your only home, car or source of income. Thus, the responsible use of credit will help you fulfil your goals and strengthen your credit.