Personal loans may seem complicated, but they don’t really have to be. Generally, they fall into one of the two categories; either secured or unsecured. The main difference between them is that with secured loans, something you own is taken as security that protects the lender in a non-payment scenario. But what else is there to know about these two predominant types of loans?
Secured loans offer the least risk to lenders
Due to this, they are also easier to qualify for, even if you don’t exactly have a shining credit score. However, if you do decide to take one, you’re going to be asked to offer something of value that can be used as non-payment security. For example, a suitable asset you can offer is real estate deed, which the lender will hold until the point of you repaying the debt.
If you don’t repay your secured loan, the lender can sell the item of value. That way, they can recuperate the losses. Typically, the item of value is an extra vehicle your own, your house, etc.
Are you seeking lower interest rates? Then secured loans are a great option to consider!
Even though the interest rates of secured loans are generally on the lower side, it’s important to keep in mind that they are mostly meant for larger purchases (like paying for a new house). People can easily end up paying them back for decades to come, and in some cases, even for the remainder of their lives. Therefore, even though the interest is lower per se, it could easily reach a grand total that’s higher than all the other options in the long run.
If you’re not comfortable risking an item of value, unsecured loans may be right for you
On the flipside, don’t be surprised if you won’t be able to get approved just like that; a stellar credit score is needed. It’s quite simple to understand why that is – basically, the lender is trying to manage the risk as efficiently as possible, meaning that the lower the applicant’s credit score, the riskier it gets to do business with them.
Interest rates are another aspect where this shows, as they will generally be on the higher side – much higher in comparison. Unsecured loans are also known for their not-as-favorable terms.
Unsecured loans usually involve smaller amounts of money
As a general rule of thumb, they are under $5000, and people tend to use them to pay for their studies, a personal vehicle, to renovate their homes, make small repairs, etc. There is another reason for this; the less money there is at stake, the less risk the lender is subjected to, so it’s easy to see why lenders are not often willing to approve more than the said amount as a loan. In other words, that number didn’t come out of the blue.
What to do if you don’t own anything of value and your credit score is not exactly something to write home about?
Not owning anything of value makes you ineligible for a secured loan, and a less than stellar credit score will make it harder for you to get approved for an unsecured loan. This can be a tricky situation to find yourself in, but luckily, there is an answer.
Without making it too complicated, basically, you need to find someone with a better credit score to cosign the loan. That way, should things go sideways and you find yourself unable to make payments, the cosigner would be held responsible.
Understandably, this option is not ideal, since it puts a lot of pressure on the cosigner. Therefore, you should always exhaust your other options prior to getting them involved (even if they are your close friends or relatives).
The consequences of not being able to make your payments on time
Since you’re already familiar with their main differences, let’s take a look at their similarities. If you allow yourself to get sloppy with your payments and don’t make them on time, the consequences are going to be visible not only on your credit score, but in your repayment history as well.
Again, don’t take these matters lightly, because being 30 days late with your payment can dramatically lower your credit score. If your payment is 150 days late, expect to be reported to the credit bureau.
If this was a secured loan, you can very well kiss your collateral items goodbye. You don’t want things to come to this point, as debt collectors can get involved, you can get sued, and all sorts of other unpleasant complications can take place. Therefore, it’s best to have some sort of steady income so you’ll be able to make your payments on time with zero problems.
What’s the final verdict?
Quite frankly, there isn’t any. It all depends on your unique circumstances and the situation you’re in.
The conventional wisdom dictates that you should only get a loan if you can’t raise the funds needed in any other way, and that you should only get a secured loan if you have money coming in on a regular basis. Alternatively, being prepared to lose the collateral item is another way to deal with it, but surely, it’s not what anyone would recommend.
It’s also a good idea to do some research on the lender you’re interested in working with. Are they reliable when it comes to fulfilling their part of the deal? Are their terms reasonable? Learning what other people have to say about them will also help you make a better decision. In order to check out the ratings, reviews, and additional details, visit loanreviewhq.com for more information and helpful tips or simply do it the good old way by firing up a search engine of your choice and sifting through the search results manually.
Being able to manage your monthly payments comes down to how well you can handle your personal finances. Can you resist the temptation to go on a spending spree and only treat yourself to something nice when you can afford it? Whether you choose a secured or an unsecured loan, these are the qualities you’re going to need in order to prevent things from going out of hand.