Pros and Cons of Secured Loans
Pros and cons of secured loans
There are two main types of loans: secured and unsecured. Secured loans get their name from the fact that there is an asset that backs up or "secures" the loan. Secured loans are very common, and they have some benefits and some drawbacks.
Low interest rates
Because there is something of value backing up a secured loan, the lender is taking on less risk in lending the money. Because of that, secured loans have lower interest rates. Mortgages and car loans, two of the most common secured loans, have some of the lowest rates of any loans on the market. Having a lower interest rate means you pay less in finance charges over the life of the loan, which is a huge advantage.
Because you have an asset to back up the loan, lenders usually are more likely to lend higher amounts with secured loans than they are with unsecured loans. That can be important if you need a large sum to go to college, start a business or make improvements to your home.
Can have assets seized
The biggest drawback to a secured loan is the fact that the lender has the right to seize the asset backing the loan if you don't make the payments. With an unsecured loan, all a lender can do is file a lawsuit to collect the debt. But with a secured loan, the lender can repossess whatever assets are backing up the loan. With a mortgage, for example, your home lender can foreclose on your home and then sell it if you can't make the payments. With a car, your lender can seize it if you don't make the payments.
Secured loans can be a good deal, but you need to weigh the pros and cons before you make a decision.