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Why a Secured Loan Right for You?

If you need to borrow money, a fundamental choice you have is between a secured loan and a non-secured loan. It is important that you understand what difference that choice would make in your situation, because it could affect both the cost of your loan and the extent to which you are putting valuable property at risk.

There is no easy answer to this question. It's not like secured loans are fundamentally good or bad - their merit depends a great deal on the situation. The more you understand the pros and cons of secured loans, the better you can decide whether one is a good fit for you.

Where Can You Get Secured Loans?

There are three major types of lenders you can go to for secured loans:

  • Bank lenders. If you already have a relationship with a bank, this might be a good place to start, but be advised that not all banks offer secured loans and your current bank may not necessarily offer the most competitive terms on secured loans.
  • Credit unions. Some credit unions offer many of the same services as banks, including loans. This would require that you be a member of the credit union, but membership requirements have become much less restrictive over the years.
  • Non-bank lenders. There are many firms that specialize in lending without offering traditional bank services, like deposit accounts. Many of these non-bank lenders have a strong on-line presence, which makes finding and comparing rates all the easier.

Use these choices to your advantage by shopping around for the best loan terms available. Because interest rates on secured loans can be fairly steep, shopping around can result in significant savings.

Why Secured Loans Can Work for You

The risks outlined above are serious considerations, but they do not mean secured loans cannot work out well for you. Here are three reasons it might be the right choice:

  1. It may be less expensive than an unsecured loan. Lenders use interest rates in part to compensate for risk. If you reduce the riskiness of the loan by securing it with collateral, chances are they will reduce the interest rate.
  2. It could help you build or rebuild your credit history. If you don't have much credit history or, worse, if that history is damaged, you may have trouble getting a loan without collateral. A secured loan might be a good start in building a favorable repayment history - if you make sure you keep up with those payments.
  3. Non-payment has pretty serious consequences anyway. Whether a loan is secured or unsecured, you should think through your ability to repay very carefully before you commit to the loan, because non-payment has serious consequences beyond just the seizure of collateral. Your credit rating is certain to take a hit, other forms of credit are likely to become more expensive or unavailable in the future, and you may face costly legal action. Just because a loan is unsecured does not mean there are not risks to defaulting.

What this comes down to is borrowing only when you have a good purpose for the money and have thoroughly examined your ability to repay. Those principles should apply to any loan, but the stakes are even higher with a secured loan.

Whether you choose a secured or unsecured loan, remember that different lenders are likely to offer different interest rate and fee terms for loans that otherwise seem identical. Some shopping around can make your loan decision as cost-effective as possible.

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