3 Risks of Taking Out a Secured Personal Loan

As you shop around for a personal loan, you’ll come across two options: secured personal loans and unsecured personal loans. So, what is a secured loan? A secured loan must be backed by collateral or something valuable you own, like a house or car.

If you don’t make payments on a secured loan, the lender can take your collateral to recoup their losses. This can be a serious issue if you rely on your collateral. Let’s take a closer look at some of the risks you might take if you apply for a secured personal loan.

1.   You put your asset on the line

In a perfect world, you’d take out a loan and be able to repay it on time without any issues. But the reality is that life happens, and you might face a financial roadblock that prevents you from doing so.

Since the lender can seize your collateral if you default on your payments, a secured personal loan is risky for you and the asset you offer as collateral. There’s a chance it will no longer be yours if things don’t go as planned and you default on your loan.

Losing your job, getting sick, or losing a loved one who financially contributed to the household are all examples of instances when things may not go as planned. So, it’s important to keep that in mind before you apply for a secured loan.

2.   Your credit can take a hit

Most lenders report your payment history to some or all the three major credit bureaus (Equifax, Transunion, and Experian). If your payment is 30 or more days late, it can be marked on your credit report, which could hurt your credit score. Multiple missed payments or a default can damage your credit even further.

Since your credit will determine which financing options are available to you and what rates and terms you receive, it’s important to protect it as much as possible.

3.   The application process may take longer

The application process for a secured loan can be longer than an unsecured loan. In addition to your personal and financial details, the lender will need to verify that your collateral belongs to you and assess how much the asset is worth.

The bottom line

If you’re comfortable offering up a valuable asset and feel you can keep up with the monthly payments, a secured loan might make sense. But if you don’t want to secure your loan to collateral, an unsecured loan may be another option if you qualify. Take the time to do your research and to make the best decision for your financial needs.

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