Secured credit is an umbrella term for a myriad ways to borrow by requiring security against the debt. There are various reasons for this kind of credit to exist, and in many cases, we’ve come to rely on it in order to attain basic things like a house or a car.
While secured credit might be the only way to acquire certain things, there are cases where it is an option rather than the sole solution. It’s good to know, therefore, what the advantages are for using this type of credit compared to unsecured borrowing.
It can be easy to become confused when looking at the different ways to borrow, especially if you don’t know what all of the terminology means. Secured credit may sound like a foreign concept to you, but it’s likely you’ve heard of – or even used – some of the most common types of secured borrowing before.
Mortgages are probably one of the most common types of secured debt that people encounter throughout their lives. The property itself acts as the security for the loan and so, if you fail to make the mortgage repayments, the bank can repossess your home. This means they can sell the property in order to recover the costs they’ve lost due to the failed agreement.
There are so many ways to finance a car but using specifically designed car finance is a type of secured credit and, like mortgages, the car acts as the asset the loan is secured against. If you don’t make the agreed repayments, the finance company can take legal possession of the car.
People often overlook pawnshops when thinking about secured borrowing because pawnbrokers tend to have a controversial reputation. But if you need to borrow a little bit of cash quickly, and you’re not able to get a loan online, pawnshops can provide you with an easy way to access that cash – even if you have a poor credit history. You can pawn a variety of items, but usually the value of the asset needs to be considerably higher than the amount you’re looking to borrow. Part of the reason is because pawnshops will want to be able to sell your item quickly in order to recover their costs, which means they may not have the luxury of time to find the best price for it. It sounds harsh, but this is a similar principal to mortgage lenders, because they need to recover their costs if you default on your mortgage, and the larger the deposit you’ve put forward, the less the house needs to sell for in order for the bank to recoup their losses.
There are a lot of benefits to using secured credit over other kinds of credit, but there are also disadvantages so you need to consider your options fully before making a decision. Some of these include:
Because of the collateral offered against the credit, secured credit lenders can often accept a wider demographic of consumers, including those who don’t have a perfect credit history or high credit score. The security mitigates the risk of customers not making their repayments. However, secured credit is not the only way to borrow if you have a bad credit history. You might find there is an unsecured personal line of credit online which suits your needs without collateral.
Some secured creditors lend at lower interest rates than unsecured lenders because of the security provided. It may be because there is more of an incentive for the debtor to repay the balance as there is a risk that they might lose something valuable if they don’t. Interest rates are usually determined by the loan duration and the risk factor.
Often, using secured credit means being able to borrow higher loan amounts than what may be available from unsecured lenders. This means you could resolve a greater variety of issues – from replacing your roof to repaving the driveway, for example.
By providing security against the debt, you offer the lender a secondary source of repayment if you fail to make the agreed repayments on time or in full. This means that if you don’t make your repayments, the lender could sell the asset to balance the debt. If the asset is sentimental to you, this could be quite upsetting. While you might never take out a loan or credit facility with the intention of not repaying it, not everything in life goes according to plan and – through no fault of your own – you could find your finances take a turn for the worse, and your previously comfortable commitments are impossible to make. If you decide to use secured credit, make sure you carefully consider the potential consequences if you are unable to make the repayments.
A lot of secured loans are usually for large amounts, which could mean you end up borrowing more than you need to. While in some cases, you might need a considerable amount of money to sort your cashflow problems, in other cases, it might be irresponsible to borrow a large sum, as you will be charged interest on your borrowing.
Secured loans are usually taken over years – rather than months. This means that you will need to budget for the repayments over a very long period of time and could increase the chances of something happening outside of your control. It might be sensible to try and build a small reserve fund for credit repayments, in case you struggle to meet a repayment over the 3-10 year loan terms.
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