Secured loans: the pros and cons

Secured loans: the pros and cons

With consumer confidence returning in the wake of the financial crash and subsequent recession, more and more people are now looking into taking out loans to cover expensive, one-off purchases. If you don’t want to borrow on a credit card, you’re really left with two options - a secured loan or an unsecured one.

Both types of borrowing have their advantages and disadvantages, and the choice you make should really be dictated by your personal circumstances and what you want to borrow for. If you need to take out a loan, think very carefully and ensure you’ve done your homework thoroughly. Here, we look at the pros and cons of taking out a secured loan.

The advantages

The main headline benefit of a secured loan is that the interest rates charged by your lender tend to be much lower than they would be with an unsecured loan or a payday loan. Rates will, of course, vary between providers, so it’s always worth searching online and shopping around for the best offers.

Another plus to an unsecured loan is that, in the majority of cases, you don’t need a perfect credit rating to be accepted for one. While your credit score will be taken into account by the lender you approach, it doesn’t have to be spotless, something which might hold you back from taking out an unsecured loan. That said, the price you pay for a less than squeaky clean credit record is having to put your home and assets up as surety against the debt. You’ll also find that the poorer your record, the higher the interest rates you may have to pay.

Finally, one major advantage to a secured loan is that longer repayment times can be offered. It may mean you pay more interest over time, but you can take out a secured loan and pay it off in manageable installments over a number of years.

The disadvantages

Of course, there are downsides to secured loans. The most obvious drawback to this type of borrowing is that you have to put your property or assets up as collateral to cover the risk of you defaulting on your debt. Failure to pay off the loan could, therefore, mean that you lose your home. The number of homes being repossessed has been rising dramatically in recent years, so this must be one major consideration when deciding on the right sort of loan for you.

Another disadvantage is that a secured loan can be subject to variable rates. While personal loans tend to have a fixed rate, a secured loan means you run the risk of interest rates unexpectedly rising and you not being able to service your debt.

Last but by no means least, many people who take out a secured loan are tempted to spend on things they never intended the money to be used for. If you’re using a secured loan to pay off other debts and consolidate what you owe into one debt, you might find you’re tempted to buy that new TV you’ve been after, or treat yourself to a holiday…

Weigh up your options carefully when taking out any sort of loan, and always make sure you find a reputable lender.