If you’re thinking about borrowing money, you might come across something called a secured loan.
Whether you need money for a car, home repairs or to cover an emergency, secured loans in Las Cruces could be an option to explore.
Keep reading to learn more about secured loans, so you can decide if one could work best for your financial situation and goals.
What is a secured loan?
A secured loan is backed with something of value that you own, called collateral, like your car or home. If a borrower defaults on a secured loan, the lender has the right to take possession of the collateral to recover the money that is still owed. An unsecured loan, on the other hand, doesn’t require collateral.
For example, if you take out a loan for a car, the car is the collateral for that kind of secured loan. If you stop making payments, the lender could repossess the car.
Keep in mind that a secured loan has borrower and collateral eligibility requirements, such as the condition and age of your motor vehicle and proof of insurance.
Pros of secured loans
Now that we’ve reviewed what a secured loan is, let’s look at the pros of having one.
You may be able to qualify more easily
If you have less than favorable credit, getting approved for a loan could be tough. But a secured loan generally gives a lender more confidence in a borrower since they could take the collateral if the borrower fails to repay the loan. That means you might have a better chance of getting approved for a secured loan compared with an unsecured loan.
You might be able to secure a lower interest rate
Since a secured loan is seen as less risky for the lender, you might be offered a more competitive interest rate. Interest is the cost of borrowing, and the interest rate of a loan is that cost that is calculated and added to your principal (the amount of money you borrowed). A lower interest rate means paying less than if you had a higher interest rate.
You may have access to a larger loan
A lender might let you borrow more with a secured loan, especially if the collateral you’re offering is worth a lot. For example, using an eligible car as collateral could potentially let you borrow up to tens of thousands of dollars.
You could build your credit
Making payments on a secured loan will be reported to the credit bureaus. If you make regular, on-time payments that history shows lenders you’re a responsible borrower. Over time, making payments on time and in full every month could help you improve your credit score, which might help you get better loan offers in the future.
Cons of secured loans
There are also a few cons to consider.
You could be at risk of losing your property
This is the biggest downside to a secured loan. If you can’t make your loan payments, the lender has the right to take your collateral. Taking away your collateral means you could lose your car, your house or the other valuable possession you used to secure the loan.
Having your asset taken away can be stressful, especially if you rely on that item in your daily life.
You could damage your credit
Missing payments on a secured loan doesn’t just put your collateral at risk — it can also hurt your credit score. Damaging your credit score could make it harder to borrow money in the future or even affect things like renting a place to live.
When to think twice about a secured loan
A secured loan is not for everyone. If you’re unsure about the future of your job or already struggle with bills, putting collateral on the line could make things more difficult. Losing your car or home because of missed loan payments is a big risk. In those cases, it might be better to look into unsecured loans, local grant programs or other kinds of support, like help from friends or family.
Carefully weigh your options
A secured loan can be a helpful tool, especially when you need access to cash and want the most favorable loan terms. But it also comes with real risks, like losing your property, if you are unable to make your monthly loan payments.
As you shop around for a loan in Las Cruces, take your time and compare your options. Ask questions to ensure you understand how the loan fits with your budget, the terms of the loan and the risks that come with providing collateral.
With a little planning, you can make an informed choice that supports your financial goals without putting your most important belongings on the line.
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