Your Questions Answered: Everything You Should Know About Secured Personal Loans, Collateral and Guarantors
Wanting to find out more about secured personal loans, collateral and guarantors? Learn what they are, their pros and cons and what they mean for you. Whether you're applying for a loan for the very first time or are weighing up your options for the next time you borrow, you'll find plenty of useful questions answered below.
What are secured personal loans?
Secured personal loans are a type of loan that uses an asset that you own or are soon to own as security for the amount of money that you borrow. Using an asset as collateral helps to ensure that if you're unable to repay the full amount of your loan, the lender can still recoup the cost. The most common assets used as collateral for personal loans are cars, but the assets accepted may vary from lender to lender. The size of the loan can also affect what is accepted as collateral as most assets are required to be equal to or greater than the amount you will be borrowing.
Some other assets that could potentially be used to secure a personal loan include:
- A cash deposit
- Other valuable assets, such as equipment, machinery, jewellery and art
What are the pros and cons of secured personal loans?
Before you decide to take out a secured personal loan, it's important to weigh up the pros and cons of this type of credit. Some of the most common advantages of unsecured loans are:
- You may be able to access a lower interest rate as the lender is given greater reassurance that they will recoup the cost of your loan. A lower interest rate will help you save money in the long run.
- As you pose a lower risk to the lender, you may be able to borrow a larger amount of money
- They are an option for casual workers and those with less than perfect credit scores as some of the potential risk is mitigated for the lender
Some disadvantages of secured loans include:
- Needing to have an asset that will fulfil the requirements of the lender
- If you are unable to pay off your personal loan, you may lose the asset that you used as collateral
- Defaulting on your loan repayments, as with any type of credit, could damage your credit score
What are guarantor loans?
In some cases, a loan applicant may be seen as being too great of a risk to a lender. While some applicants may be denied immediately, others may be able to borrow an amount of money with a guarantor loan. A guarantor loan is a type of loan that sees another person other than the borrower use their assets as security for some, or all, of the money borrowed. In offering their home, car or other assets as security, the guarantor takes responsibility for paying back the value of the loan if the original borrower cannot. Much like a secured loan, this type of loan requires the guarantor to offer up an asset, such as a car or house, as collateral.
What can you or a guarantor use as collateral?
There are many different things that may be used as collateral when applying for a secured loan or a guarantor loan. These can include:
- Cash accounts
- Valuables and collectibles
- Equipment and machinery
Of the different types of collateral that could be used, some of the most common include property and cars. You might decide on using your car as security for a loan if it's smaller in size, while property is typically used to guarantee home loans and loans for other big ticket items.
The types of collateral accepted by lenders will vary, so it's a good idea to check what they will accept before you apply for a loan.
What are the pros and cons of guarantor loans?
Just like any kind of loan, guarantor loans offer several pros and cons to borrowers and guarantors alike. Although circumstances will vary depending on the lender, the amount borrowed and the guarantor, some potential pros include:
- Lenders may be more willing to lend money to borrowers with a guarantor as the risk is seen to be lower
- Having a guarantor may allow you to borrow more money than you otherwise would have been able to
- They may make it easier to get approved for larger loans, such as a home loan, without having to save a full deposit
While there are plenty of pros to weigh up, some potential cons of a guarantor loan are:
- If the borrower is unable to repay the loan, the guarantor could lose the assets they offered as collateral if they cannot meet the financial obligations either
- Being a guarantor could reduce your chances of being approved for other loans while there is an outstanding balance
- Failing to repay the loan could see a default listed on the credit reports of both parties
- As most guarantors are either the friends or family of the borrower, a negative experience could harm the relationship between the two parties
What other options are available?
If you're not wanting to risk your assets or the assets of friends and family, an unsecured loan may be an option to consider. This type of loan does not use collateral to help secure the amount that you borrow, which can mean that the interest rates applied are slightly higher. Although loans that require a guarantor or collateral do tend to be larger in size than most unsecured loans, there are plenty of different ways that you can make use of them, from buying a car and paying for a wedding to carrying out much needed renovations on your home.
Depending on your needs, an unsecured loan may be a better fit for you, providing greater flexibility and helping you to avoid using your assets as collateral. As with any financial product, however, it's important that you weigh up the advantages and disadvantages of each loan type.
Other forms of credit
Depending on the size of the purchase you're considering, there may be other forms of credit that you could use instead of secured loans or guarantor loans. Rather than taking out a loan using your car as collateral, you may be able to use credit cards, buy now pay later services or even store payment plans. Before you commit to any form of credit, however, be sure to do your research and weigh up the pros and cons of each option.
Holding off or rethinking your purchase
If the only options available to you are secured loans or guarantor loans, it may be worth holding off on your purchase or taking some time to rethink your spending plans. Both types of loans can have serious consequences for you and anyone who acts as a guarantor if you are unable to meet your financial obligations. If you are able to hold off on your purchase until you are more financially secure, it may be wise to do so. Weighing up other options, such as purchasing a used car instead of a brand new car, could also reduce your reliance on these types of loans.
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