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Secured loans or unsecured loans?

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You might find yourself in the position of looking for unsecured loans, as most people will need to borrow money at some point in their lives, whether they are planning a major purchase or are paying off debt. But everyone has different financial circumstances, so they might consider different types of loans for their specific needs.

Traditional secured loans are the go-to for many people, but not everyone has the necessary collateral for that. Unsecured loans are a good alternative, but good credit history is essential. You can find out more about unsecured loans here. Both types have benefits and drawbacks and all these different aspects need to be considered before making such a serious financial decision.

Benefits of secured loans

  • You can get larger amounts of money

One of the main draws of a secured loan is that it allows you to borrow large amounts of money, so if you want to make a big purchase, like a new car or a house, you can get the amount you need all at once, in a single loan. Another advantage is that you can get more than you need and have a nice little nest egg for leaner times, as long as you can afford the higher repayment instalments.

  • You get longer repayment terms

The other major benefit of secured loans is that you can take your time paying it back. The repayment terms extend across decades, so you don't have to worry about needing to repay the loan back right away. That gives you some wiggle room both right after you get the loan and further down the line, when your financial situation might change and you may be able to make larger payments, pay it off earlier, etc.

  • You get lower repayment rates

With secured loans, you repay monthly, just like with any other loan, but the repayment instalments are in lower amounts, due to the longer repayment allowance. Because your loan is divided into instalments over a longer period of time, it makes sense that they are in lower amounts, so they might be more affordable.

Drawbacks of secured loans

  • You need to put assets up as collateral

Obviously, the main drawback of a secured loan is that you need to put your assets up as collateral. That comes with several ramifications. First of all, you need to have the assets to offer as collateral, which is a requirement that stops a lot of borrowers from qualifying, in the first place.

Then, that asset is blocked for the remainder of the repayment term, however long that may be. That means you can't easily sell or transfer ownership of the asset, should you want to. Of course, the worst case scenario is that the asset gets taken away should you be unable to repay the loan and need to default. Putting an asset up as collateral is always a risk.

  • Repayment may outlive the purchase

Most people who get secured loans do so in order to finance a major purchase. However, by the time you repay the loan, it might not be worth it. You see, if you're buying a car, for example, it might have stopped working long before you repay the loan. The difference is felt even more on major household appliances with a shorter lifespan.

Benefits of unsecured loans

  • They don't require collateral

The most attractive thing about unsecured loans is that they do not require you to put up your assets up as collateral. So, if you do not own any valuable assets, don't want to block them for a long time, or simply don't want to risk having them taken away in case you default on the loan, unsecured loan companies can offer you excellent alternatives.

  • Anyone can borrow money

Even if you're young or don't have significant assets, and regardless of what you intend to do with the money, you can get a loan. The sum you have access to will depend on how good your credit history is, but even if it's not stellar, you might still benefit from unsecured loans for bad credit. Find out tips for getting cheaper unsecured loans

Drawbacks of unsecured loans

  • You can't get as much money

The problem with unsecured loans is that the amount you can get is limited. While you may still have access to the maximum unsecured loan amount, depending on how high your credit score is, it's not nearly as much as you would get with a secure loan. Lenders can't afford the risk of giving out large sums of money to people who aren't worth that much, so they can't recoup their losses, although some companies do offer unsecured loans with no credit check.

  • Interest is higher

Since the repayment term is shorter, repayment instalments are higher, as is interest. That means that you actually end up paying back significantly more money than you borrowed in the first place, which can be a real deal-breaker for some people. It also depends on what you're going to do with the money. If you only need it for a short amount of time, the interest isn't worth it, so it might be more convenient to just get a short-term loan from a friend.

Are unsecured loans better for you than secured ones?

Having read through all of the pros and cons, you can now hopefully make an informed decision on whether you should get a secured loan or an unsecured personal loan. Are unsecured loans worth it? Is it better to go for the more traditional secured loans? That depends entirely on your financial situation, on whether or not you have collateral, and how much you intend to borrow.

In conclusion, both loan options have pros and cons and which one is best for you largely depends on what you're looking for and what your financial circumstances are. Take a good look at all the different points raised in this piece about both loan choices and make your final decision based on facts and numbers. As long as you act in a sensible and cautious way, there is no reason why your loan application shouldn't be a success, regardless of the type of loan you're after. Always do a soft search before applying for any loan, a great place to start is on Money Saving Expert's Eligibility tool.

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