The Demerits of Secured Loans as Compared to Unsecured Loans

A common dilemma facing those with assets, who wish to take out a loan, is to choose between an unsecured loan and a secured loan. Often a lender may only grant a secured loan if a large amount is involved, thus the decision is removed from your hands. Secured loans have the advantage of usually being cheaper to service than an unsecure loan, and fixed as opposed to variable rates of interest may be available. However there are several demerits to secured loans as compared to unsecured loans.

Anyone contemplating a secured loan needs to fully understand that they are risking the very asset they offer as security. In most instances where large amounts of borrowing are required, the security in question will by your home. Your home is therefore at risk if you meet financial difficulties in the future and struggle to repay the loan.

If you were to run into financial problems whilst still owing a secured loan, the lender has first claims on your funds if he notices any problems before the mortgage company does. The first lender to take legal action will have first rights to any funds you have, thus your home can be put at risk if you are put in the position of being legally obliged to pay your loan before your mortgage, and cannot afford to do both.

Your home is doubly at risk as the loan provider may claim the asset you put up as security, thus forcing the sale of your home to recover their debt. Any time you offer your home as security you risk losing it to future circumstances which are unforeseen at the time of taking the loan. You could end up losing all the equity you have built up in your home, as well as your home itself.

Sometimes those who provide secured loans add penalty clauses to them, making it expensive for you to repay the loan early when you are in a position to do so and thus save on interest payments. It is crucial that you aware of any such clauses when you take on a secured loan, and at least shop around for a loan provider who does not impose early payment penalties.

Due to the risk to your equity, and indeed to losing your home itself, it may be necessary for you to consider taking out supplementary loan insurance to provide peace of mind in case your circumstances do change. This is an expensive extra to pay for on top of your loan, and may never even be necessary, but it is something you should take into consideration despite the extra expense.

If you do opt for a secured loan, or have no choice in the matter, look for one with flexible repayment terms so you can pay it down when extra funds are available, and one free of penalty clauses. Your aim should be to discharge the loan as quickly as possible to reduce the risk of anyone having a claim against your property, and subsequently claiming it.