Often, in our search for financial options, we are brought to a crossroads where we have to choose between secured and unsecured loans. Both are equally attractive and put the borrower in a difficult situation. It is difficult to decide on a particular financial option because each one has its advantages and disadvantages. What makes deciding on the financing option more difficult is that both secured and unsecured loans have a conflicting set of features, with the disadvantages of one being outweighed by the other.

Secured loans vs. unsecured loans

Secured loans are the most conventional method of financing large sums of money. Even in earlier times, people used to take loans to use for agriculture or other similar needs by holding their land as collateral. Unsecured loans, on the other hand, are of recent origin. Since secured loans required the borrower to hold their home as collateral, many people who were homeless or did not prefer to attach their home to their obligations were left without financing. This also hampered the loan business of the lenders because the pool was sizeable. Thus, unsecured loans were launched as an alternative to secured loans.

Misconceptions About Secured Loans

There are many myths going around that have led to a decline in the popularity of secured loans. People believe that by offering the house as collateral they will have to move house until they repay the borrowed amount. People only transfer property rights and not the right to inhabit the home. The lender can claim the home only when the borrower does not pay the loan in full.

This will particularly interest homeowners who do not take out secured loans to protect their homes. Another important point that these people need to keep in mind is that they cannot escape from the lender even by taking an unsecured loan. Although these loans are offered without any collateral, the lender finds ways to recover the remaining amount of the unsecured loans.

This will change an important part of the clientele of unsecured loans that is part of the owners. However, unsecured loans continue to be the lifeline for renters. This is despite the fact that unsecured loans are more expensive than secured loans. The interest rate charged by unsecured loan customers is higher due to the higher risk involved.

credit requirements

You often hear about credit history in financial circles. Credit history is a record of an individual’s behavior in terms of credit behavior. Any default by an individual on any debt, loan, or mortgage is immediately recorded on the credit file. Although lenders prefer a borrower to have a good credit history, they do not attach special importance to whether the borrower offers collateral. Home can back the loan if the borrower refuses to do so. However, the backing is absent in an unsecured loan. This is why lenders require a good credit history when offering an unsecured loan. Lenders who agree to offer bad credit unsecured loans try to offset the risk with an even higher interest rate.

Terms differ with a secured loan

With a secured loan, you can actually enjoy more favorable terms than unsecured loans. Aside from the low interest rate, there are many more unique features for secured loan borrowers. Some lenders allow borrowers to extend the repayment period on secured loans as long as they wish. The typical repayment period is between 5 and 30 years. However, extending the payment term increases the interest that the borrower will have to pay. Borrowers can discuss with experts the optimal term that will reduce interest costs without increasing the burden on monthly income.

Whichever option is chosen, due consideration must be given to the conditions under which the option will function. A particular financial option that worked wonders for your friends’ finances doesn’t necessarily have to work the same way for you. Instead of improving the situation, they sometimes strike back with dire financial consequences. Taking a second opinion is always beneficial as it helps test the validity of the advice offered by your lender.