Secured Loans Risks: A Myth?
There is a lot written about secured loans and the risks that they imply. The purpose of this article is to analyze thoroughly the repossession issue and whether the risk is significant or not. Also, …
There is a lot written about secured loans and the risks that they imply. The purpose of this article is to analyze thoroughly the repossession issue and whether the risk is significant or not. Also, we intend to prove that the risk of defaulting on an unsecured loan is not really different than defaulting on a secured loan in terms of the losses it can imply.
Nevertheless, there are differences between unsecured and secured financing. What we want to show is that the benefits of secured financing are in most situations, more significant than the drawbacks that they imply, at least when compared to both the advantages and drawbacks of unsecured loans and lines of credit.
Defaulting On A Loan
When it comes to finances, default occurs when the borrower is unable or unwilling to honor his obligations with the lender. In fact, default implies the continued failure to repay a particular loan or debt and the proven inability or unwillingness to retake the repayment process and honor the debt. A single missed payment does not necessary imply a default.
The consequences of this delinquency are disastrous. The credit score of the borrower will suffer greatly if a default is recorded into his credit report. Thats why it is so important to avoid missed payments and also to avoid closing on too onerous debts that you are not sure youll be able to repay. A default can stand in the way between you and reasonable rate financial sources for a long time.
Collateral And Repossession
Collateral guarantees the repayment of a secured loan through the action of repossession. In the event of a default on a secured loan, the lender can take legal action of repossession in order to claim the property used as collateral and force its sell so as to recover the money invested by him through the secured loan.
The action of repossession is a legal procedure that takes a short period of time and that it isnt pursued against the borrower and all his assets but against the particular property used as collateral for the loan. Its a rather inexpensive procedure that doesnt imply a long legal process.
This doesnt imply that with unsecured loans the lender cant take legal action to recover his money in case of default. Truth is that the lender can take you to court and force the sell of your assets all the same if you default on an unsecured loan. The only difference is that secured loans offer a higher protection. The legal processes to recover the money from unsecured transactions are slow and very costly compared to repossession and thus, most lenders prefer to renegotiate the terms of the debt or hand it to collection agencies that are prepared to deal with these situations.
Thus, when you are considering different financial products, take into account that unsecured loans do not have less risk for the borrower, they just grant you more time to renegotiate if you default on your loan. But the terms of unsecured loans are less advantageous than those of secured loans. And thus, if you are a homeowner with enough equity available on your home, it is always better to request a home equity loan and obtain inexpensive financing knowing that youll be able to afford the monthly payments on the loan.