Loan Types

Is a Secure Loan Worth the Risk?

A secure loan is one that uses an item as security. Commonly you would use your home or car as collateral. What this means is that if you were not able to make repayments on the loan then your home or car could be repossessed in order to pay for the debt. It is a very common thing for people to do when paying a mortgage or a car loan but it is worth assessing the risk before you do it.

If you are buying a home, then it is most common to use a mortgage and have the house as collateral. This means that if you get to the point where you are struggling to make the repayments then the bank will take the house, sell it and use the profit from the sale to pay back what is owed on the loan. With this sort of loan you will risk losing your home, but there are many advantages as well. You will have a home to live in and not have to pay rent. Once the mortgage is paid off you will not have to pay to live there. When you apply for a mortgage, the lender will check your finances and only lend to you if they feel that you will be able to repay it and so there is less risk than with other loans that do not do this.

A similar situation may happen when you buy a car. If you need a loan then the car may be used a collateral and then if you do not manage to make all of the repayments it can be taken and sold in order to cover the cost. The checks on this sort of loan are not so thorough so it will be up to you to decide how much of a risk you think it will be. If you need a car to get to your job and you cannot pay for it without a loan, then you have a little choice. However, if you choose a low price car that offers good value for money and put money by in case you are in a situation where you are low in income and so risk not being able to make a payment.

There are other types of loan where you can use your property as security as well. These are likley to be personal loans. It is worth considering whether you really need the money enough to put your home or car at risk. It will be a personal decision and very much depend on what you are using the loan for. It maybe for something essential, so you feel it is well worth the risk or it could be for a luxury item and therefore may not be worth the risk.

A log book loan is another example of a loan where you will use your car as collateral. These are set up depending on the value of your car minus any other loans held against it. If you miss a repayment they will repossess the vehicle. How much risk you are willing to take will depend on what you want the money for. You may feel that the money is extremely important and you are willing to risk your car. If you need that car for work though, it is important to be really careful as losing the car could mean losing your job.

So calculating whether a secure loan is worth the risk is not easy. Only you will know how much you need the money and whether you think that you will be able to keep up the repayments. If you have more than one income in the household or a very secure job then this is less of a risk, but it is worth considering what might happen if you do and how you will manage. If there is more than one wage earner in the house, this will help, but putting money aside to help you cope should you face financial difficulties could help as well. It is worth thinking about whether you really need this money or whether it is better not to risk a secure loan to get it.

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