A secured loan is a financial agreement wherein a lender offers a sum of money for a short period of time and the borrower pledges an asset as the collateral. A secured loan can also be for the long term. Home loan is a secured loan, so is car loan. A personal loan from a bank is secured but one from a private lender may not be. If there is no collateral or security, then it is not a secured loan. Here are the pros and cons of such loans.
Advantages of a Secured Loan
- A secured loan has a moderate annual percentage rate. The interest levied on a secured loan is much less than the interest applicable for an unsecured loan. You are perhaps aware that the rates for home loans or mortgage are less than those for car loans. Interest on personal loan is higher than both. Interest on business loans may be even more than that on a personal loan. Secured loan interests are much less than the rates levied on credit card. The most important advantage of a secured loan is the interest.
- A secured loan amount is usually much greater than the sum available as an unsecured loan. It is nearly impossible for anyone to get a loan amount of five thousand pounds unless there is some kind of security. Unsecured loans are usually worth a few hundred pounds. Past association with a lender may enable a borrower to get more than a grand. A secured loan amount can be in thousands and in some cases up to a million.
- A secured loan has a much longer repayment term. If it is a short term loan, then the repayment period could be two to five years. Long term secured loan can have a repayment period of five to thirty years. Albeit rare, there are some secured loans that can have a term of over thirty years.
Disadvantages of a Secured Loan
- A secured loan requires an asset and a good credit score. Those who have a bad credit score will not qualify. Those who do not have any asset that can be used as the collateral or security will not be eligible.
- A secured loan can be hard to get. Banks are usually stringent with their approval process. If you need some funds urgently, you will have better luck with unsecured loans. Some banks take as long as a month to approve a loan. Traditional financial institutions also take time. The process is long and complex, even though you are offering something worthwhile as collateral.
- Secured loans are available for specific purposes. You cannot get one for just any random reason. You may use a personal loan for purposes you choose but even then the amount has to be worthwhile. You cannot expect a bank to just give you five hundred pounds or even two thousand as a personal loan. They will only entertain applications for larger sums. There isn't enough return for them in smaller loan amounts to consider the application, take the risk and then carry out all the formality to approve and disburse the loan.