short term loan

Why a Secured Loan is Sometimes a Better Option

When borrowing money in your personal life, there’s different choices for how to go about it. When you’ve exhausted obvious ideas like a loan from a friend (because it can ruin a friendship or you need a larger sum than they can afford), then it’s time to consider lending facilities from a loan provider. 

A loan can be unsecured or secured. In this article, we cover some reasons why taking a secured loan might be a better option under some circumstances. 

Lower Interest Rates

Unsecured loans carry higher interest rates which means they’re costlier to repay over the loan period.

What is the reason for this?

It’s because of the lack of any pledged security or collateral that a lender could use to cover the redemption value on the loan should it go unpaid. The reduced risk to the lender because of the pledged collateral results in lower interest rates for borrowers. Essentially, you’re a safer bet and so the borrowing facility is cheaper. 

You’ll Take the Loan More Seriously

If you’ve previously had some issues with borrowing money and repaying it, then you’ll want to keep a tight rein on your spending. This way, it ensures that you’ll have enough income to make the loan payment every time. 

What may further encourage you to be more responsible is the collateral and the consequences of failing to make the payments. Whether you’ve pledged your home, a title on an asset or something else that you personally value, just having that on the line is often enough. By comparison, an unsecured loan will get pursued when not repaid but what’s at stake is less clear. 

Secured Loan Approval is Likelier

Getting approved for an unsecured loan is harder to do. The lender is having to make a judgement call based on your past history with credit and your current credit score. Depending on how well you’ve handled credit in the past, there’s a possibility that you may get rejected for an unsecured loan. 

Due to the fact that a secured loan has collateral security built-in, there’s a reduced risk to the lender. Therefore, they’re likelier to approve this type of loan even if your credit rating isn’t fabulous. 

Build Your Credit Score Back Up

Taking out a secured loan and covering every scheduled payment on time looks good. When doing this, your credit score will improve.

Once the loan is completely repaid, the improved score should be reflected with the three major credit reporting agencies (TransUnion, Equifax and Experian). A better score ensures future credit applications will be looked upon more favourably. Also, the interest rate offered is generally lower when you’re seen as a lower risk borrower too.

A secured loan isn’t the right choice for everyone. If you’re uncomfortable with pledging specific assets to cover the loan, then an unsecured one at the higher cost is a better option. However, when you’re a responsible borrower and wish to save on interest payments, then a secured loan is almost always going to be the frugal choice.

Leave a Reply

Your email address will not be published. Required fields are marked *