They are among the most common types of loans. In addition they are easy to obtain as long as the borrower has the required collateral. Generally, secured loans are considered to be a much better option as compared to unsecured ones mostly due to the friendlier loan conditions. There are however a few pitfalls that you should beware of.
Secured Loans – The Pitfalls
You need to have enough collateral to obtain the loan. If you do not have something of value such as a house or car, then you will not be able to obtain a loan. This prevents many people from getting secured loans.
You expose yourself to the risk of losing property in case of a default in repayment. Even if you have a well laid down repayment plan, unexpected things still happen and you may be unable to repay your loan. In such a situation you stand to lose your hard earned property.
If you have poor credit, the lender may decline to give you the loan. In the event that you qualify for a secured loan even with the poor credit score, the interest rate is bound to be high due to the increased risk to the lender.
Secured loans also depend on your income. This means that inadequate income may disqualify you from getting the loan or getting less than the amount you anticipated.
Late repayments may attract higher interest rates or additional fees.
How to Avoid These Pitfalls
Before taking out a secured loan, have a well laid out repayment plan and consider all aspects before making the final decision. If things go wrong after you have already taken the loan, credit counseling may help.