How Important is it to Offer Security, While Borrowing Money?
When it comes to letting your friends borrow your possessions, you tend to want to receive something, in order to guarantee a safe return. Like if they borrow a shirt or dress for a weekend, you might want more than just their word, to ensure that you will get it back in one piece. This simple exchange of items is one way to look at securities for when it comes to personal loans. A security is an asset that is offered by the borrower to the lender in the form of collateral so if anything goes wrong with repayment of the loan, the security can be re-possessed. Now right off the back foot, this concept sounds a little scary, but it is true for a good reason why you should consider getting a secured loan over an unsecured loan.
Unsecured Personal Loans
An unsecured personal loan as you may have guessed is a loan that has no security offered as collateral. Since there is no security provided, an unsecured personal loan is considered riskier for lenders. Think of it as like there is no extra incentive for the borrower to make regular payments of their loan. The borrower could more easily fail to make a repayment or not realise the severity of making the incorrect actions. This is why personal lenders tend to give higher interest rates for unsecured personal loans, because they judge the loan off your financial history. They deem these loans to be riskier, and therefore an increased rate is needed to protect their business financially if any mishaps occur during the loan. An unsecured personal loan then has a much lower borrowing limit as they do not wish to lend out large sums of money when the risk is too high.
So pretty much you would only try to get an unsecured personal loan if you have an impeccable credit history and credit score or if it is for a smaller amount. As the process (compared to a secured personal loan) is much quicker and simpler for getting additional finances. So what’s the difference for secured personal loans then?
Secured Personal Loans
A secured personal loan has an asset offered as security so the extra incentive of the possession being taken as collateral, gives the lender more confidence in the loan and assesses it to have less risk. Whether you offer a car, a boat, a house or any other possession of monetary value, the lender will deem the personal loan to be less risky and so, therefore, will give it a lower interest rate. So this is a big thumbs up for the borrower. A lower rate means that they can pay their finances off earlier and could also mean lower and more manageable repayment amounts, further boosting your credit score.
So if you deem yourself financially secure and believe that you can work out a manageable repayment time frame and amount, a secured loan could be the loan for you. Because:
You will receive a lower interest rate.
You will be allowed to borrow larger amounts of money (e.g. enough for a new house or vehicle)
You will receive easier repayment amounts, meaning you will have an easier time boosting your credit score.
So that’s pretty much as basic and as simple as you can get for explaining the differences between secured and unsecured personal loans. When you weigh up the rates and factor in your securities, the right asset could mean the difference between $100’s or even $1,000’s when it comes to the conclusion of your repayment period. So next time you enquire about applying for a personal loan, take a look at your assets and deem what could work best as security. The best part of offering security is the fact that you still have ownership and get to use it while you are paying off the loan. It’s like having your cake and eating it too.
If you have any questions about secured and unsecured personal loans, please call us on 0800 536 328. If you are interested in applying for a loan, please visit www.nzcusouth.co.nz.