No one is prepared for everything, and when there’s not enough money to go around, getting a loan may be someone’s best option. Consumers are becoming more hesitant to take on debt, but while there are good reasons for that, some things can’t wait. A broken-down car could spell financial disaster for someone who lives in a rural area, and kids who need dental work or other procedures can’t afford to wait until money is available to get their treatment. Debt is a tool, and it’s okay to use it in order to prevent worse problems down the road.
Someone who possesses something valuable can use it as collateral when requesting a loan from a bank. That’s what a secured loan is, and it results in lower monthly payments and a lower interest rate because there’s less risk for the lender. A secured loan gives the lender the right to repossess whatever was used as collateral if the borrower defaults. The lender is then able to sell it to recoup some of the losses, and in some cases, courts will order the borrower to pay the remaining balance if the sale doesn’t cover the remaining balance of the loan.
The beauty is that this is a low-risk proposition for the borrower. While banks technically have the right to seize items used as collateral as soon as one payment is missed, banks will usually give borrowers a lot of leeway. Putting the borrower into default and seizing his assets is an incredibly expensive and time consuming endeavor, and it’s a lot less of a hassle to negotiate a new payment plan than it is to sic hounds on the borrower. Secured loans also come with very reasonable rates; borrowers pay less over the lifetime of a secured loan than they do for an unsecured loan.
Unsecured loans are for people who either have nothing that’s valuable enough to serve as collateral or who don’t want to take the risk. Secured loans are a safe bet for anyone who has a steady source of income, but there’s always a chance that another disaster will strike and the collateral will be lost. If the only thing that could serve as collateral is the family home, then it may be wiser to pay a bit more and go with an unsecured loan. They come with higher interest rates, and lenders tend to be less forgiving when borrowers miss payments on unsecured loans, but it’s up to borrowers to determine what kind of risk they’re willing to accept.
Choice and Risk
Someone with poor credit may only be able to acquire a secured loan, and he’ll end up paying rates that are closer to unsecured loans than someone with better credit. That’s a situation where he may be better off foregoing other debt payments or delaying certain things. Secured loans are a safe bet on paper, but it’s still possible to lose in a big way if something goes wrong.
Unsecured debt, especially in the form of credit cards, has far-reaching implications if the borrower can’t keep up with the payments. However, being unable to lease a new car may ultimately be better than losing a house. There’s no such thing as risk-less borrowing, and someone who needs money has to determine what he’s willing to put on the line in exchange for a momentary expansion of his pocketbook.
Sarah Smith is a guest writer for www.netloans.co.uk where you can find out more about Net Loans.