Advantages, disadvantages of secured loans
Secured loans are loans that are backed up by collateral. Home mortgages, car loans and loans from life insurance policies are all considered secured loans. There are a number of advantages to secured loans, but also some drawbacks.
Lower interest rates
One of the main advantages of secured loans is lower interest rates. Because the loans are backed up by collateral, there is less risk to the lender, which means they are willing to lend at lower rates. Home mortgage rates right now are below 4 percent for people with good credit, while auto loans for new cars are below 3 percent. On the other hand, people with excellent credit would be lucky to get an unsecured personal loan with an interest rate that is twice that.
Another advantage with secured loans is that you usually can borrow more. Car loans are often five figures and home loans usually are in the six-figure range. With an unsecured loan, you may not be able to borrow more than $10,000, unless you are wealthy and have a high credit score.
With secured loans, you usually get a longer time to pay back the money. Car loans can go as long as seven years and home loans can be for 30 years. With unsecured loans, on the other hand, you usually have to pay back the money in five years or less.
Risk to collateral
The one big drawback to secured loans is that you are risking your collateral. If you can’t make the payments on your loan, the lender can seize your home or your car. This is a very big risk that you don’t have with an unsecured loan, where the only recourse the lender has if you don’t make payments is to file a lawsuit against you.