If you’re unfamiliar with what a secured loan is about, it is the type of loan that involves collateral from the borrower. Unlike unsecured loans, where the lender cannot hold the borrower accountable if a payment is missed, secured loans give them. In the event that you find yourself unable to repay the loan, the lender simply repossesses the property in order to recover any costs associated with the loan.
- You Need to Borrow a Larger Amount of Cash
Secured loans are very common for people who intend to borrow large sums of money. You may be able to release as much as 50% to 75% of your asset’s value, depending on the amount of your equity. Often, the loan money is used for major expenses such as buying a new asset, making new investments, or funding a business expansion.
- You Want Lower Interest Rates
If you aim to get a loan with competitive rates, a collateral can help. This is because the extra value present in the collateral serves to guarantee that the lender can get their money back, no matter what happens, and that reduced risk is reflected in reduced interest rates as well.
- You Intend to Consolidate a Large Debt
If you have debts that have become very difficult to manage, one of the options you can explore is debt consolidation. Debt consolidation means consolidating all your existing debts into a whole new loan, wherein you only need to make regular payments to one new creditor. This means you don’t have to manage through multiple debts and due dates, and often, the repayment terms are also stretched so that your monthly payments are reduced. The big catch though is that the loan is often secured against a big property such as your home.
If having your debts consolidated against your property means lower interest rates, lower monthly payments, and a more manageable repayment term all in all, it may actually make sense, especially if your debts have spiralled out of control. Nevertheless, debt consolidation should always be considered as a last resort.
- You Have Inferior Credit
Lastly, putting your collateral down the line may be necessary if you have damaged credit, because getting a normal loan can be very difficult. Many lenders would require some sort of security that you intend to pay them back, either by having a guarantor or by having a loan collateral.
In this case though, it’s not guaranteed that you will get competitive loan rates unlike if you have good credit and a collateral in place. The role of collateral if you have bad credit is to limit the risk of the lender and improve your chances to qualify for a loan, but still, it wouldn’t hurt to try and haggle for a better rate.
A Word of Caution
It is important to remember that with huge money come bigger responsibilities as well. While putting down a loan collateral can unlock various credit possibilities, you can never neglect the fact that there’s a huge risk involved when any of your properties is associated with a loan.
It would also be wise to get a quote about how much your property is worth from a trusted third party, so that the results are unbiased. This way, you can release the best amount possible for your asset. Knowing the correct value of your property will also help you in the event of repossession, because the sales proceeds will be used to cover any outstanding balance you owe and all excess will be returned to you.