Maybe you’re new to credit and loans, or maybe you’ve been around the block a few times. Either way, there’s one thing we can all agree on: credit is complicated. So let’s break it down for you in a simple way. If you want to to acquire a secure line of credit, let’s go over some things that might help you make the right decision.
What is a secured loan?
Secured debts are basically where you borrow up to a certain amount that you can payback. Still, instead of just having the lender take your word for it that you’ll be able to pay them back when they lend you the money, they make you pledge an asset—usually property—as collateral. If you don’t pay them back in full by the agreed-upon date, they’re entitled to seize your property to cover the debt.
The pros of secured debts
Secured loans are the opposite of traditional loans, where approval depends more on your credit profile. If you have a poor or no credit history, the odds aren’t good that you’ll be approved for an unsecured line of credit.
Here are some benefits to considering secured debts :
Lower interest rates
Secured debts tend to offer better rates than unsecured ones because the lender has less risk. The worst that can happen is losing the collateral if you default on your loan, so lenders can relax their standards and make it easier for borrowers to get approved.
Higher approval odds
Even people with bad or no credit scores often find it easier to get a secured line of credit than for unsecured ones. Having collateral helps offset the risks associated with lending to someone with limited or poor credit.
You can build or rebuild your credit score.
If you have bad or no credit and need to rebuild it, opening a secured debt line can be an effective way to do that. Again, paying off the balance every month on time shows lenders that you are responsible for your money.
You can get access to your money in emergencies.
When we say emergencies, we mean true emergencies – like if your car breaks down and you need it fixed right away to get to work the next day. In this situation, having cash available could keep you from missing work and potentially losing hours or even your job.
Cons of secured debts
Secured loans have a lot of benefits, but they also come with some disadvantages. Here are the main cons to consider before opening one:
The collateral you pledge could be negatively impacted
If you use an asset such as your home or car to secure a loan, you’ll need to make sure you’re able to make your payments. If not, you could lose your collateral due to defaulting on the loan.
You might need to pay an annual fee.
Many secured loans charge annual fees, some of which are pretty high. It’s essential to compare the costs and benefits of these loans to make sure they’re right for you. In some cases, it may be a better idea to use an unsecured personal loan instead.
Payments may be due in full each month
Unlike many other types of secured loans, such as home equity loans or auto loans, secured loans often require borrowers to pay at least their minimum payment every month or risk being charged a penalty fee.
A secured loan is an exciting product, and it can undoubtedly be a good idea for responsible consumers. However, it’s not for everyone. If you typically live within their means, and you want to take advantage of opportunities that come your way, then a secured line of credit can enable a tremendous growth potential. But if you tend to overspend or get into financial difficulty, then taking out a secured line of credit will likely cause more harm than good. How to Pay Off Large Credit Card Debt in a Short Span of Time