As easy as it may be to borrow money from banks, the large number of deals and offers that they come up with from one year to the next can make it difficult to determine which one is the best choice for you. Although each one of the terms and conditions is important when it comes to signing a loan agreement, there is one main element that everyone should pay attention to whether the loan is secured or unsecured.
This having been said, the main difference between the two is the risk-to-reward ratio. In other words, secured loans have higher value limits but not being able to repay them brings about considerably worse consequences than those of unsecured ones.
If you are interested in borrowing money from a bank and are unsure whether to choose a secured or unsecured loan, you will need to go through certain steps to determine if the larger amount of money is worth the risk. Here is what you need to know:
What Is Collateral?
Unlike payday loans that do not have serious, direct consequences if you’re late repaying them, secured ones require collateral. Generally speaking, the collateral that the borrower must put up when signing a loan agreement is a guarantee offered to the lender. Suppose for whatever reason, the borrower cannot return the money or misses several monthly repayments (the terms and conditions may vary from one lender to another). In that case, the lender is entitled to take possession of that collateral.
Also, the guarantee, or collateral, can be any number of properties or highly-valuable items that the lenders considered appropriate. Most secured loans require that the borrower offers his home or his car as collateral. However, there are also deals where you may be able to put up your home equity as a guarantee.
Lenders Would Rather Not Take Your Home
Now, it is important to mention the fact that most banks and other private lenders will never actively try to take possession of the borrower’s property. This is mainly because turning the collateral into money that they can use to cover the debt would take time and cost quite a bit.
Lenders will usually try to work with borrowers to find a new, more accessible repayment plan. However, in the eventuality that the money simply cannot be repaid, the property will be transferred to the lender.
When Are Secured Loans the Better Choice?
Secured loans are typically better if you either need to access a very large amount of money or if your credit rating is not high enough for an unsecured loan. Furthermore, the best time to get a secured loan is when you have long-term financial stability. Getting laid off while repaying one of these can be extremely dangerous.
When it comes to collateral, securing a loan against your home should always be the final solution, or if you are certain that you will be able to repay the money on time. When possible, offer your car or another property as collateral.
Which Is Better for You?
Overall, if you do not need a large amount of money or are in a difficult financial position, it is better to get am unsecured loan. These may have a smaller value, but the debt is not as difficult to manage if you are unable to repay it on time.
Alternatively, those who need a very large loan for expensive medical procedures or home renovation projects, will be better off choosing a secured loan, provided that they are sure that they will be able to repay the money.
As a golden rule, whenever you intend to sign a secured loan agreement, make sure to get an appraisal for the property that you offer as collateral. Banks are usually fair when it comes to what value they assign to a property. However, other lenders may try to convince you to put up something that is, in reality, more valuable than the loan.