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Business News/ Money / Unsure about taking a secured personal loan? Here are the pros and cons
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Unsure about taking a secured personal loan? Here are the pros and cons

Personal loans can be backed by collateral, known as secured personal loans or collateralised personal loans.

Securing personal loans with collateral. (Mint)Premium
Securing personal loans with collateral. (Mint)

Personal loans can be backed by collateral, allowing you to borrow money from a lender by using an asset you own as security for the loan. The collateral serves as a guarantee for the lender. If you are unable to repay the loan, the lender has the right to take possession of the collateral to recover their losses.

Here are some important points to keep in mind regarding secured personal loans:

  • Benefits: Secured loans typically offer lower interest rates and longer repayment periods compared to unsecured personal loans. This is due to the collateral, which minimises the lender’s risk.
  • Drawbacks: If you fail to repay the loan, you risk losing your collateral. Additionally, secured loans often involve more documentation and appraisals than unsecured loans.

Some typical forms of collateral used for secured personal loans are:

  • Automobiles
  • Motorcycles
  • Savings accounts
  • Certificates of deposit

While automobiles, motorcycles, and savings accounts are typical examples, nearly any valuable asset or personal property can be used as collateral for a secured personal loan. This could encompass items such as

  • Investments: Depending on the lender, stocks, bonds, and mutual funds may be eligible as collateral.
  • Valuable possessions: Items like jewellery, artwork, antiques, or other collectibles can be used, provided they can be appraised at a fair market value.
  • Real estate: Although less common for personal loans, some lenders might accept land or a home with sufficient equity as collateral.

Ultimately, the types of collateral accepted will vary based on the lender’s policies. Therefore, it’s always advisable to consult with the lender you’re considering to determine what options they provide.

Do all personal loans need collateral?

Not all personal loans necessitate collateral. Many are unsecured, meaning they are approved based on your creditworthiness without requiring an asset as security. For borrowers with lower credit scores, providing collateral can enhance their likelihood of securing approval for a personal loan. The collateral offers the lender greater security, increasing the chances of loan approval.

Secured vs unsecured personal loans: What’s the difference?

Deciding between a secured and unsecured personal loan depends on your circumstances and preferences. The advantages of opting for a secured personal loan include:

  • Reduced interest rates: Since the lender can reclaim the collateral if you default, they can provide you with a lower interest rate.
  • Higher loan amounts: Secured loans typically offer greater borrowing limits compared to unsecured loans.
  • Improved approval odds with bad credit: If you have a low credit score, collateral can enhance your likelihood of loan approval.

However, secured personal loans come with potential drawbacks as well. These include:

  • Risk of forfeiting collateral: If you fail to repay the loan, the lender can take and sell your collateral to settle the debt.
  • Increased paperwork and appraisals: Secured loans often require more documentation and appraisals for the collateral, which can lengthen the approval process.

Choosing an unsecured personal loan offers its advantages, which include:

  • No risk to collateral: You don’t jeopardise any assets if you fail to repay the loan.
  • Quicker and easier approval process: Unsecured loans typically involve less paperwork and have a faster approval process than secured loans.

The drawbacks of opting for a personal loan without requiring collateral include:

  • Elevated interest rates: Unsecured loans often carry higher interest rates since the lender lacks collateral as a safety net.
  • Limited loan amounts: The maximum borrowing limit for an unsecured loan is usually lower than that of a secured loan.
  • Stringent credit score criteria: Obtaining approval for an unsecured loan typically necessitates a good or excellent credit score.

For those contemplating a secured personal loan, it’s crucial to carefully evaluate the advantages and disadvantages. Ensure you can manage the monthly payments and recognise the potential risk of forfeiting your collateral.

Frequently Asked Questions (FAQs)

Q. Are secured personal loans always superior to unsecured loans?

Not always. While secured loans provide lower interest rates and possibly higher loan amounts, they carry the risk of forfeiting your collateral if you fail to repay. Unsecured loans are quicker to secure and don’t necessitate collateral, but they generally come with higher interest rates and more limited borrowing amounts.

Q. Does providing collateral guarantee my loan approval?

No, but it can enhance your likelihood of approval, particularly if you have a low credit score. The lender will evaluate both your creditworthiness and the value of the collateral.

Q. What credit score is required for a secured personal loan?

Credit score requirements differ among lenders, but generally, you’ll need a fair to good credit score (usually 640 or above) to be eligible for a secured personal loan.

Q. How much can I borrow with a secured personal loan?

The loan amount is determined by the lender’s policy and the value of your collateral. Generally, you can borrow up to a certain percentage (approximately 70%) of the collateral’s appraised value.

Q. What fees come with secured personal loans?

Secured loans can include origination fees, appraisal fees, and additional charges. Make sure to compare the fees from various lenders.

 

 

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Published: 13 Apr 2024, 06:45 PM IST
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