Unless we were lucky enough to be born into wealth, or accumulate a great deal of wealth at a young age, all of us will likely have to borrow money at some stage. Whether it’s to pay for a car, an education, or just a once-in-a-lifetime vacation, explore your borrowing options before borrowing money from somewhere and then paying it back over time is often easier than trying to save up and make large purchases in cash.
If you’re a homeowner, you have more options when it comes to loans than someone who isn’t. So long as you have equity in your home, you likely have the option of securing any further borrowing against that equity instead of taking it on an unsecured basis. If this is a new idea to you, you might be wondering why you’d do such a thing when it would give a lender a charge against your home, but there are several potential advantages.
You’re More Likely To Get Accepted
Your credit rating is your best friend when it’s good, and your worst enemy if it’s bad. A clean credit rating tells a lender that you’re a good candidate for lending, and a poor one tells them that you’re not. Think of it this way; you’re in a casino. You have $2000 in your pocket, and you have to place it all on one bet. Do you put it on red or black at a roulette table, where you have almost a 50/50 chance of success? Or would you put it all into a slots game on online website such as Amigo Slots, where your chances of a win on a single spin aren’t as high? You’d obviously choose the roulette table over slots, and so would lenders. Not winning on every spin is part of the fun of playing slots; it builds anticipation for your next big win arriving. It’s less fun for lenders. If your payment history on existing credit commitments looks like the payment history of a slots game – more misses than hits – they’re unlikely to want to lend to you.
This can sometimes feel a little unfair if your credit issues or in the past, or resolved. Missed payments could still be held against you even long after you’ve caught up on your commitments. If you’re able to offer some equity as security, though, you can overcome this problem. Lenders are more likely to lend to people with poor credit histories if they can offer an asset as security, because having the security mitigates the risk they’re taking in lending to you.
Your Interest Rate Will Be Lower
Whether you have poor credit history not, taking a secured loan will always result in a lower interest rate than taking an unsecured loan, or borrowing on a credit card. Again, this is all about risk. With unsecured borrowing, a lender faces several potential obstacles when attempting to get repayments from you. You could lose your job, or get sick, and have no other means of making repayment. You could move house and not tell them, leaving them having to try to locate you to get their money back. With a secured loan, the lender knows where you are, and has a stake in your property should you fail to repay. That means they can be more relaxed about how much they charge you for the interest. Also, the interest rate on a secured loan usually remains the same throughout the term – which protects you from the unpleasant spikes in credit card rates that can sometimes occur.
You Can Make Repayments Over A Longer (But Guaranteed) Term
With a credit card, you could make minimum repayments for twenty or thirty years and never make a dent in the total balance you owe. With an unsecured loan, you’ll be facing a comparatively high level of interest, but also a comparatively short repayment term. Banks tend to want unsecured loans to be paid back to them quickly; it’s almost unheard of to be offered a repayment term of more than ten years. That can heap pressure on your shoulders when it comes to repayments; if you’ve borrowed a significant amount, they can eat away at your monthly disposable income. With a secured loan, you can generally borrow the money over a longer-term – usually all the way up to retirement. The reason why are the same as the reasons for the other benefits that secured loans can bring; there’s a reduced risk to the lender, and so they’re happy to offer favorable repayment terms for you. They know you’re not going anywhere – and even if you do, they’ll be entitled to full repayment from the proceeds of your house when it’s sold.
The main downside of taking out a secured loan is that your come could be at risk if you fall behind with repayments, so you should be very sure if your ability to repay any borrowing before you agree to take a secured loan out. If the idea of securing lending against your home is a little scary to you, there are other securities lenders may consider. If you have a particularly valuable car, some banks will consider lending against its value. There’s even an emerging trend of people borrowing money against the value of paintings or other works of art that they own – although we appreciate that not many people have access to priceless works of art!
If you’re struggling to get finance elsewhere, and you have an attractive asset or security to offer to a lender, getting finance secured on that asset may be the best way of securing funding you would otherwise be unable to secure. It may also be the best route to getting the terms you want, with the lowest possible interest rate. Despite that, a secured loan should only be entered into after professional financial advice has been sought and obtained – and this article does not constitute financial advice! The information provided in this article is for the purpose of education. Speak to an adviser before making important financial decisions.
