Many people associate secured loans with heavy risks and give the impression of chasing someone who has taken them. Even the mere mention of collateral can make many borrowers cringe. However, the truth is that secured loans offer more benefits if availed of wisely and responsibly, as they are less risky for lenders.
In this article, we will discuss why you shouldn’t be afraid of secured loans, as well as how you can have a safe and transparent borrowing experience with a secured loan from a licensed money lender.
Overview of Secured Loans
Before we dive into why secured loans shouldn’t be scary, it would be better if we first defined what they are and how exactly they function.
What are secured loans?
Secured loans are a type of loan where borrowers provide collateral to the lender in exchange for loan proceeds. This collateral is usually in the form of assets like real estate, vehicles, or other valuable items such as debt consolidation. The collateral acts as security for the lender, reducing the risk associated with the loan.
How do they work?
Just like getting a regular loan, a secured loan is submitted to a lender, who will assess the value of your collateral to determine the loan’s terms, including the interest rate and repayment period.
Once the lender feels satisfied with your creditworthiness and the value of the collateral, you will sign a loan agreement with them. This agreement includes loan terms such as interest rate, monthly payments, and the repayment schedule. The lender then disburses the loan money to you after approval.
For example, if you get a car loan, the lender may pay the car dealership directly on your behalf. Now your responsibility is to make regular monthly payments to your lender per the terms agreed upon.
Benefits of Secured Loans
Lower interest rates
Compared to unsecured loans, secured loans typically offer lower interest rates because the collateral reduces the risk on the lender’s end. Let’s say you are about to get a loan and are given two options: a mortgage for a house valued at $250,000 as collateral with an interest rate of 4% and a 30-year loan term, or an unsecured loan with no collateral with an 8% interest rate and a 5-year loan term.
As you can see, the secured loan has a lower interest rate. This is due to valuable collateral.
Collateral loans primarily provide security for the lender, so lenders are more willing to approve loan applications, even from borrowers who may not qualify for an unsecured loan.
Moreover, borrowers who have a lower credit score or those with a limited credit history can get a secured loan.
For example, you and your sister are looking to borrow $250,000 for personal expenses. You apply for an unsecured personal loan, while your sister applies for a secured personal loan using her car as collateral.
You have 1200 credit scores with a yearly income of $60,000, while your sister has 1350 credit scores with a yearly income of $55,000. Both scores mean you and your sister are below the excellent range, indicating some credit challenges. According to Credit Bureau Singapore, individuals who score 1000 have the highest probability of defaulting, and those who score 2000 have the lowest probability of reaching delinquent status.
The credit score of your sister is higher and lower your yearly income, but she may make it easier to qualify for secured loans because her car serves as collateral. Moreover, although your sister has a lower credit score and lower yearly income than you, the lender can repossess the car and sell it to recover the outstanding loan amount if she defaults.
Access to bigger loans
Oftentimes, secured loans give borrowers access to larger amounts of money than if they were taking unsecured loans. Once again, this is due to the collateral serving as protection for the lender, lowering their risk and allowing them to issue larger sums of money to borrowers.
The value of collateral is an important factor in determining the loan amount and can even support a more substantial amount. For example, you are thinking of buying a house valued at $400,000 and using it as collateral. The lender valued the fact that you put up the house as collateral and approved a larger amount of $350,000.
But when you think you are taking an unsecured loan because you’re thinking of taking a vacation, don’t hope that you will get a loan that far exceeds your expectations, as there are no collateral assets that you can guarantee to the lender.
Long repayment terms
Secured loans that are usually in larger amounts offer longer repayment terms. Coupled with lower interest rates, longer repayment terms on secured loans can make monthly payments more affordable for borrowers.
For instance, with a 30-year term, the borrower makes lower and therefore more manageable monthly payments that fit within their budget. This is particularly attractive to homebuyers, who might be making one of the largest financial commitments of their lives.
Brave to take responsibility for secured loans
When used responsibly by borrowers, secured loans can provide the financial resources needed to achieve goals. Lower interest rates, easier qualifications, higher loan amounts, and longer repayment terms make these loans easier to manage.
If you still have worries about this kind of loan, you can also consult first with a licensed money lender in Singapore. They guide borrowers like you through the loan application process and provide advice on suitable financial solutions.
An author of DigitalGpoint, We have published more articles focused on blogging, business, lifestyle, digital marketing, social media, web design & development, e-commerce, finance, health, SEO, travel.
For any types of queries, contact us on [email protected].