Choosing a Secured Loan Over
an Unsecured Loan

Why a secured loan is better

In spite of what it infers, there can be advantages in choosing a secured loan especially for those who do not quite meet the qualifications for an unsecured loan. In other cases, it can make a difference in the interest rate or the proceeds of the loan.

Purpose of a Secured Loan

There are many reasons a lender may insist on a secured loan. The ability of a borrower to provide sufficient collateral can make the difference between a lender granting a loan or not. Some of the reasons a lender may require security for a loan include the following:

• Credit score and history
• Employment stability of the borrower
• Purpose of the loan (purchase of high ticket items)
• Amount of the loan request
• Repayment term the borrower needs
• Financial stability

Secured loan lenders are very reluctant to approve loans without a security interest. In order to received an unsecured loan you have to have a very high credit score and job stability. In most cases only borrowers with excellent credit can receive an unsecured loan, and even then the loan proceeds are limited. Of course, those who have a long term relationship with the lender and a very high income may be exceptions.

Don't Be Offended if the Lender Asks for Collateral

Sometimes applicants have a tendency to become offended when lenders insist upon a secured loan, but this is not a reflection of your credit worthiness in all cases but rather the restrictions of the lender. You have to remember that your loan officer is tied to guidelines he must follow. Sometimes he is able to override the regulations and make his own decision, but he has to be able to justify doing that. Thus lenders are very strict in their decisions regarding unsecured loans. Even though you have a high credit score and longevity in your job, your income may not quality you for the amount of money you need to borrow without collateral.

Advantages of Secured Loans

Before you walk away with the intention of seeking a lender who is not as adamant about your request for an unsecured loan, you should keep in mind that in many cases the interest rates on secured loans are lower than those on unsecured loans. Interest rates are directly tied to the amount of risk the lender assumes when loaning money which is why even a borrower with a low credit score can buy a new car or finance a home. They will not pay the same interest rate someone with a higher credit score will, but they will be able to finance what they need.

Secured loans allow you more flexibility in the repayment term of the loan. Since these loans are tied to either motor vehicles or real estate, the lenders tend to be more flexible with the payment terms. With the cost of today's cars, you can usually obtain financing for seven or eight years depending on the age of the vehicle while loans secured by real estate can go up to fifteen and sometimes twenty years. Remember that a longer repayment term means more interest over the life of the loan, so if you can afford to pay your loan off sooner, you also have that option.

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