As the old saying goes, “money cannot buy you happiness”.
Sure, money can’t buy you happiness. It is, however, required for many other things: buying a house, starting a business, covering your medical expenses, taking that dream vacation and even sending your children for further education. Some of us might not have the required finances at hand and may explore options such as taking out a loan.
It is useful to note that there are different types of loans available from financial institutions today, all of which are designed to meet different needs. They are, however, generally categorised as unsecured and secured loans.
Such loans are given only when a personal guarantee or collateral is provided. The collateral can be used by the financial institution to recover the debt owed by the borrower if they fail to repay it. If a personal guarantee was used, the guarantor will be required to repay the loan on behalf of the borrower in case they fail to repay the loan.
Secured loans are considered low risk to the creditor: they are able to recover what is owed to them whether or not the borrower pays. The creditor can take possession of the asset that was pledged as collateral and offset what was owed to them. For example, if a borrower defaults on their mortgage, the bank can seize the house and sell it to recover the money that was borrowed to purchase it.
Unsecured loans, on the other hand, are given without any form of security. This presents a great risk to the creditor. There is no asset that they can use to recover what is owed to them if the borrower defaults on the loan. The borrower doesn’t therefore stand to lose any asset if they are unable to repay the loan. However, failure to repay the loan can do serious damage to your credit score, which can prevent you from getting another loan or other forms of credit.
Unsecured loans are a great way to access money that you need without having to lose possession of a valuable asset. This type of loan includes:
• Personal loans
• Home renovation loan
• Payday loans
• Credit card loans
• Peer to peer lending
• Education loans
Many financial institutions prefer to give secured loans due to reduced risks compared to unsecured loans. Examples of secured loans include vehicle and home or mortgage loans. There are many benefits of secured loans to borrowers. These include:
1. Access To Loans Despite Bad Credit History
You’ve probably heard that having a good credit score is necessary if you want to access a loan. This isn’t true for secured loans. Lenders might overlook a poor credit history because you are able to provide security for the loan.
2. You’ll Get Access To More Capital
Secured loans are considered a lower risk than unsecured loans. Financial institutions are therefore willing to lend more money. It is thus possible to take a loan that is large enough to cover the entire cost of your home, car or other large purchases.
3. Lower Interest Rates
These loans pose a lower financial risk to the lender meaning that they might be able to provide even more attractive loan conditions to encourage more people to take up these loans. You might even be able to negotiate for a lower interest loan and better terms for your loan agreement.
4. It’s Cheaper All Round
Not only are the interest rates on these loans lower, but also the fees and charges. Many financial institutions don’t charge a pre-payment or pre-closure for this loan. You will repay much less on a secured loan than what you would pay for an unsecured loan.
1. The Risk Of Losing An Asset
The financial institution has the right to recover the asset(s) that you pledged as collateral for the loan if you’re unable to make regular payments or default on the loan. This is done in order to recover the money that you owe.
2. You Could Lose Money
Do you have a fixed deposit account with the bank that you have borrowed money from? You could lose your deposit amount if you fail to pay the loan off.
1. Security For Your Assets
Since no collateral(s) are required for unsecured loans, you do not run the risk of losing any personal property such as your home or car.
2. Access To Flexible Loan Terms
These loans are often given on flexible terms and you can often qualify for an unsecured loan without having substantial assets.
1. Higher Interest Rates
Typically, unsecured loans have a much higher interest rate compared to secured loans because the lender runs a higher risk of the loan not getting repaid.
2. Difficult To Obtain
Qualifying for an unsecured loan is usually more difficult if you do not have a positive credit history or credit score. If such a situation arises, you may need to look for a someone who has a good credit history and score with a stable source of monthly income to sign the loan documents with you.
The choice of which type of loan you should take will depend on your financial profile as well as your requirements. You should, however, consider the merits and risks involved before you commit to any type of loan.
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