When Will Collateral Loans Be Better Than Unsecured Loans? – Fast Action Finance
Borrowing is a great responsibility and should be treated with the amount of seriousness it deserves. You should decide whether you want to go for a secured or an unsecured loan before you undertake the process. For you to borrow collateral loans, you are required to present an asset to the lender as security in case you default in paying. In most cases, lenders ask for your land, house or your car. Unsecured loans on the other hand do not require you to have any form of collateral or security in order to get money. Collateral loans have many advantages over the alternative as outlined below:
Lower interest rates
Collateral is usually a guarantee that you will pay the amount paid within the prescribed timeline, or else the lender will repossess your asset. For car title loans, the institution will take possession of your car if it is in good condition and its value can be able to account for a portion of the debt. Such a guarantee reduces the amount of risk borne by the lender, hence reducing the interest rates charged on the borrower.
On the other hand, unsecured loans charge higher interest as there is a likelihood that the borrower may not pay back the money owed. This makes the lender more prone to default hence losses in the end. Therefore, such loans have to attract high interest rates to cover the increased risk.
More access to money
Lenders are generally more receptive to the idea of the borrower providing a fall back plan in case they are unable to complete the payment. This guarantees them that they will still meet their profit margins no matter the circumstance, hence are willing to lend larger sums of money on a collateral loan. Providing a worthwhile car as security for your car title loan will build the lender’s trust in you- that you will indeed fulfill your part of the obligation.
Lenders are less likely to grant unsecured borrowers access to larger sums of money as they do not have any guarantee that the money will be repaid. Such loans rely on the borrower’s promise that they will pay; and we all know that unforeseen circumstances may lead to breaking of such promises.
Less reliance on credit worthiness
Before obtaining money from a lending institution, lenders have to check your credit history to help them understand your financial behaviour. This history is important in determining the likelihood of you paying your debt. An upside of secured loans lenders is that they focus less on the borrowers’ credit worth as they have an asset they can sell to recover their money. Therefore, you do not have to worry much if you have a bad credit score or ranking; your security will save you.
For unsecured loans lenders, your credit worthiness is taken very seriously. A bad ranking mean that your chances of defaulting are higher, hence increases the risk the lender has to bear. Such borrowers are quite unlikely to obtain an unsecured loan.
Collateral loans are usually better in the following circumstances:
If you own an asset
If you have an asset, like a car registered under your name in this case, then you are better off going for a secured loan instead of an unsecured one. The asset should be of a certain value as the amount of money you can borrow is calculated as a percentage of the market value. Another benefit of having a car as security to the loan is that you can continue using it in the duration of the loan, and this is pretty convenient.
If you need to borrow a large sum of money
Generally and for obvious reasons, lenders trust borrowers who can guarantee loan repayment through their assets. Therefore, they will be more willing to provide them with large sums of money as compared to borrowers of unsecured loans. A great advantage of presenting collateral is that you can borrow as much money as your asset can allow.
If you have a not-so-perfect credit history
Have you defaulted in the past due to circumstances out of your control? Lenders who offer unsecured loans will most likely reject your loan application when they discover this. Collateral gives the borrower some sort of leverage when it comes to getting the money they need, especially when they have defaulted in the past. It guarantees the lender that they will not incur losses even when you default.
Convenience and affordable interest rates
Secured loans have lower interest rates than unsecured loans, hence more affordable to the borrower. Besides, they are more flexible as you can vary the duration period to a more convenient timing as long as you are permitted to do so in the contract. If you need a more affordable and convenient credit facility, a collateral loan is your best bet.