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When you get a secured loan, you are guaranteeing to the lender that you will repay the loan somehow. If you cannot repay with money, they will take other assets away from you. Home loans are a great example of a typical secured loan. The buyer will sign a contract, and will therefore forfeit their home if they fail to repay. Technically, the lender can legally take the property from you if you miss a single payment. Luckily for the homeowner, that never actually occurs. Up to a few months late, the worst that will probably happen are strict letters demanding payment. They would rather you pay them, even if you’re a little late, then to go through the long process and paperwork of reclaiming and selling the house to recoup their money. Unsecured loans are different from secured loans in that the interest rates are higher because the right to seize property is not guaranteed upon failure to repay. Since the lender is taking a larger risk, they require more money from you this is especially true for consumer loans for those with poor credit. This is necessary to cover the costs of when people default on their loans. Also, people are less motivated to make payments without major repercussions for not paying (like losing a home). This lack of motivation causes more defaulted loans, making interest rates even higher. As a borrower, you’ll need to decide whether you would rather have a higher interest rate and less risk of losing assets, or a lower interest rate and the risk of losing your home or assets. If you don’t have any high value assets like a home, or you don’t want to put them at risk, you will have to take the higher interest loan. The decision will be up to you. Make sure you put a lot of thought into what you want to do, because it is very important. Author: Michael Benifez Discuss this article in our Discussion Groups 30 Comments for 'Pros and Cons of Secured and Unsecured Loans'Leave a comment |
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