Debt Management

Advice on Secured Loans

When you are searching for options to fund a new purchase, you have to make a choice between unsecured and secured loans. There are advantages to each of these, and it ultimately depends on the financial condition of the borrower, as to which alternative becomes preferable.

Unsecured Loans versus Secured loans

Unsecured loans are a recent innovation in finance, unlike secured loans which have been around for centuries. Even in the older days, people used to borrow money after keeping their land as security. This was the way most farmers were able to get money to finance buying of seeds and fertilizers for their activities. Unsecured loans have led to larger risks being taken by lenders and this has led to rates and terms for such loans being far more costly and stricter. Mortgages are a form of secured loan, because the property being acquired itself is offered as collateral, to guard against default in payment.

Secured Loans and Credit Ratings

Financial institutions always prefer to have clients that have good credit ratings. Even so, where collateral is offered as security for the loan, they may not give this credit rating too much of importance, as their risks are covered by the asset value of the pledged security. A good credit rating and a loan that is covered by collateral can lead the lender to offer much more generous terms. So, interest rates will be lower, conditions will be easier and payment concessions will figure in the final contract. A poor credit rating along with collateral will still allow you to get the required loan, but because of the poor history, terms are likely to be stiffer and more demanding.

Business Secured Loans

Most banks offer businesses secured loans that require some sort of collateral. This can be in the form of any property that the business has rights over. While property is the most preferred, banks will even offer such loans against equipment, vehicles and any other asset that the business has.  Before such loans are granted, the lender will insist on an independent valuation of the assets, so that they cover the full value of the loan being considered. In some cases, banks may even offer to give such loans against shares or stock, as long as the company has a history of being well traded in exchanges. Businesses even in case of secured loans, are expected to provide complete financial details and history, so that the lender can ensure that they have the necessary business acumen to run the business profitably. A well-run company can even further negotiate to get very advantageous terms, that ultimately lower the cost of such financing.

Secured loans must always be preferred by both individuals and businesses as the interest rates in them are much lower. It also enables an idle asset like a home or other property or collateral to realize its potential value, which otherwise lies dormant. Loans are normally offered that can go as high as a hundred percent of the value of the security offered, though eighty percent is more the norm. Click here if you need to get more information on secured loans.

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