Often times, in our search for financial options, we find ourselves at a crossroads where we have to choose between secured and unsecured loans. Both are equally attractive and put the borrower in a difficult situation. It is difficult to make a decision regarding a particular financing option because each one has its advantages and disadvantages. What makes deciding on the financing option more difficult is that both secured and unsecured loans have a contradictory set of characteristics, with the disadvantages of one being offset by the other.
Secured vs. Unsecured loans
Secured loans are the most conventional method of financing large sums of money. Even in ancient times, people used to borrow for agriculture or other similar needs, keeping their land as collateral. Unsecured loans, on the other hand, are of recent origin. Because secured loans required the borrower to keep their home as collateral, many people who were homeless or who did not prefer to link their homes to obligations were left without financing. This also hampered the lenders’ loan business because the pool was sizeable. Thus, unsecured loans were launched as an alternative to secured loans.
Misconceptions about secured loans
There are many myths that are circulating that have led to a declining popularity of secured loans. People believe that by offering a house as collateral, they will have to move out until they pay the amount slowly. People only transfer property rights and not the right to live in the home. The lender can claim the home only when the borrower does not repay the loan in full.
This will be of particular interest to homeowners who do not take out secured loans to protect their homes. Another important point for these people to keep in mind is that they cannot escape the lender even by taking an unsecured loan. Although these loans are offered without any kind of collateral, the lender finds ways to recoup the remaining amount of the unsecured loans.
This will change a significant portion of the unsecured loan clientele that homeowners understand. However, unsecured loans are still the livelihood of tenants. This is despite the fact that unsecured loans are more expensive than secured loans. The interest rate charged to unsecured loan customers is higher due to the higher risk involved.
Credit requirements
Credit history is often heard of in financial circles. Credit history is a record of an individual’s conduct in terms of credit behavior. Any default by an individual on any debt, loan or mortgage is immediately recorded in the credit file. Although lenders prefer that the borrower have a good credit history, they do not place special importance on it if the borrower offers collateral. Home can back the loan if the borrower refuses to do so. However, the backing is absent on an unsecured loan. This is why lenders demand good credit when they offer an unsecured loan. Lenders who agree to offer bad credit unsecured loans try to offset the risk with an even higher interest rate.
Terms differ with a secured loan
With a Secured loanIn fact, you can enjoy more favorable terms than unsecured loans. Aside from the low interest rate, there are many more unique features for secured loan borrowers. Some lenders allow borrowers to extend the repayment period of secured loans as much as they want. The typical repayment period is between 5 and 30 years. However, extending the repayment term increases the interest that the borrower will have to pay. Borrowers can discuss with experts the optimal term that will reduce the cost of interest without increasing the burden on monthly income.
Whichever option is chosen, due attention should be paid to the conditions under which the option should work. One particular financial option that did wonders for your friends’ finances doesn’t necessarily have to work the same way for you. Instead of improving the situation, they sometimes strike back with dire financial consequences. Having a second opinion is always beneficial, as it helps to test the validity of the advice offered by your lender.