Are Secured Loans the Best Option For Bad Credit Borrowers?

Borrowers with bad credit find it much more difficult to get great rates and terms on loans and credit cards. Lenders assess the risks of lending to consumers using credit history and credit scores. The level of risk posed by any given consumers dictates the willingness of a lender to loan the borrower money, and the nature of the rates and terms. Borrowers that are less risk because of a solid credit performance can find much better rates and more favorable borrowing terms.

There are opportunities for borrowers that have had some struggles with bad credit to obtain loans. Typically, a borrower that poses a strong risk to the lender must offer some type of risk aversion to get a reasonable loan. This risk aversion usually takes the form of a secured property. A borrower might offer his property or another asset as collateral to give the lender recourse in the event of non-repayment of the debt obligation. This is called secured debt.

Homeowner secured loans are a common type of secured loan. Property is the most valuable asset most people own and is thus commonly looked to as a source of security for a substantial loan. Thus, a borrower with bad credit seeking a loan of a significant amount would likely have to secure the loan with their home or property. When a borrower puts up their property as collateral for a secured loan, the lender obtains a lien against the property and could potentially repossess the home in the event of non-repayment.

While many borrowers of all credit types use secured loans to get the best rates and terms on loans, bad credit borrowers often have no other alternative. Some lenders required borrowers with low scores to secure loans of above certain amounts. Other times, it is simply impossible for a bad credit borrower to get a practical loan rate and terms without securing a loan. Unsecured debt for bad credit borrowers often comes with high interest rates and fees that are also intended to reduce the lenders risk. Borrowers do need to understand that while secured loans do usually offer better borrowing opportunities, they also pose substantial risk. A secured loan exposes the secured property to risk. It is extremely important that a borrower is confident he can meet the loan obligations before obtaining a secured loan. Careful assessment of income to expenses is the key.

By Martin Sumner

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