5 Pros And Cons Of Secured Loan

A secured loan requires some collateral for it to be processed. It could be assets like vehicles, properties, and sometimes cash accounts. In other cases, borrowers pledge valuable investments and collectibles as collateral.   

The purpose of the collateral is to act as security to the lender. Therefore, should the borrower neglects to pay the loan, the lender is allowed to seize, repossess and sell the collateral to recoup the balance from the loan. Due to this sense of security to the lender, secured loans have less risk and, therefore, attract lower interest rates and borrower requirements, unlike unsecured loans.  

However, even with low-interest rates, secured loans have disadvantages. All the same, whether you’re looking for secured or unsecured loans, it’s safer when you approach professionals like Loans Auckland. 

With that, this article will look at the pros and cons of secured loans. Keep reading to learn more.

Pros Of Secured Loans  

Here are some of the advantages you may enjoy from going for a secured loan: 

1. Lower Interest Rate 

As discussed at the start of the article, when you offer security or collateral for your loan, you reduce your lender's risk. The lender is allowed to sell the properties you have put up as collateral to recover their money should you default on your loan payment. Therefore, secured loans incur lower interest rates due to reduced risks.  

2. It’s Easier To Qualify For A Loan 

When you have collateral, you're in a better position to pay off your loan. Also, should you not pay your loan, your properties can be repossessed by the lender and used to settle the loan balance. It, therefore, builds confidence in you as a borrower, making it easier for you to qualify for a loan, unlike someone looking for an unsecured loan.  

Also, some institutions offering secured loans don't need a good credit score to get the loan as long as you have collateral. They can therefore offer loans for people with bad credit.

3. You Have A High Loan Limit 

Usually, you get awarded a loan that is 80-90% of the value of your collateral. Therefore, the higher the value of your collateral, the higher the loan amount you can request. It means that with a higher loan limit, you can meet your needs more effectively without having to ask for a complimentary loan elsewhere.  

4. It Offers A Long Tenor 

Secured loans allow you to repay the loan over a long period, usually between five to ten years. It benefits you since you spread the cost, making the loan payment more affordable. Additionally, when the loan payment is affordable, it'll reduce the risk of default settlement, gaining you a bad credit standing.  

5. It Can Help You Build Good Credit Scores 

Since secured loans allow payment over a long period, you can use this to your advantage to build a good credit score. To do this, make sure you make your loan payments on time and without fail. It will show your dedication to paying the loan and improve your eligibility to secure higher loans in the future.    

Cons Of Secured Loans 

Here are some of the disadvantages of taking a secured loan: 

1. Risk Of Losing Your Collateral 

One of the biggest disadvantages of secured loans is that, should you default on your loan payment, you risk losing the property you have used as collateral. The lender is allowed to repossess your properties, house, cars, or whatever valuable you have used as security. They can sell the collateral to offset the outstanding loan balance.  

2. Access To Large Loans Could Lead To Financial Difficulty 

Secured loans give you access to high amounts of loans. While this is a good thing and may help you meet your financial needs, it's an impending disadvantage. It's because you may be tempted to take a loan of more than you need.   

If you waste that money, you'll have a very hard time repaying your loan. That's why experts advise that, despite having access to secured loans, only take what is enough and use it for something productive. Similarly, come up with a comfortable structure for payment.  

3. Secured Loans Take Longer To Be Processed 

Depending on the financial institution you approach, an unsecured loan can be processed and deposited in your account the same day you request. However, secured loans, typically take longer to process. It's because of the work done to secure your loan.  

The financial institution has to ensure that the collateral you’re given is yours. Also, most secured loans are high amounts, hence the need for the lender to make sure you tick all requirements and criteria for the loan is crucial to them.  

4. Spreading Payments Could Lead To Paying More 

Secured loans allow you a long tenure to pay the loan. However, by spreading the loan, you could end up paying more. So, make sure that the spread out of payments will not lead you to a higher amount of interest.  

5. Defaulting Loan Payment Could Severely Affect Your Credit Score 

Should you default on paying a secured loan, it can severely damage your credit score, unlike defaulting on unsecured loans. Additionally, applying for several unsecured loans within a short time may appear like a red flag, and some institutions may deny you loans.

Summary 

A secured loan is given against collateral. It can be any valuable item that equals the value of the loan you're taking. Should the borrower default on paying the loan, the lender is allowed to repossess the collateral and sell it to pay the loan. If you're thinking of taking a loan, consider first learning some of its advantages and disadvantages to help you make an informed decision.