Debt is not something most people want. It is useful for banks and other financial institutions, as well as necessary for many businesses. However, for individuals and small businesses, it is a necessary evil we just have to live with. Sometimes, there is no better way to get certain things done.
If you are looking into getting a loan, you will be presented with two types: secured and unsecured loans. A secured loan is any loan that uses a seizable asset as security. For example, you may secure your loan using your car. If you are unable to make payments, the lender can take your car.
But why would you choose a loan through which you could lose your assets? This is how you will know it is the right time to get a secured loan.
The benefits of a secured loan
The reason a secured loan is a good option is that the lender is taking on less risk. Since they know that even with non-payment they will be compensated, they will loosen restrictions and conditions. You will get a lower interest rate and better repayment terms. Furthermore, you do not need as strong a credit score to get a loan.
While there is the risk that you will lose your security, you should be confident from the start that you will be able to pay the loan back. Seizure of assets is always a last resort.
There are particular factors that indicate it is the right time for a secured loan.
You are earning a fixed income
A secured loan is a good option when you are earning a fixed income each month and can work payments into your budget. If you are working for yourself or taking on contracts, a secured loan is a risk. After all, one bad month could lead to consequences. While there is no guarantee you will continue earning an income at a full-time job, you do have more certainty.
If you are not earning a fixed income but know that you will earn enough to at least make payments on the loan, you can assess the risk and make a decision.
You have a low credit score
If your credit score is not up to scratch, you will struggle to get an unsecured loan with anything resembling a reasonable interest rate. Any unsecured loan will come with conditions that seem designed to get you further and further into debt. You will end up making payments that don’t even make up for the interest, leaving you in a debt cycle.
With a low credit score, a secured loan is the best option. As long as you are confident you will be able to pay it back, you can use it to build your credit score.
You are settled
These days, a lot of people are becoming digital nomads, moving around the world as they work. If this is your lifestyle, getting a secured loan is going to be very difficult unless you have assets that you are using to make further money. Getting a secured loan makes more sense when you are settled in one place, not looking to buy a new home or sell your car. Otherwise, when the time comes to do these things, you’re going to have to take the loan into account and deal with bureaucracy. A secured loan will not prevent you from moving on with your life, but it will make a nomadic lifestyle much more difficult.
The reality is that you will get a loan when you need one, regardless of whether it is the right time or not. However, a secured loan works best in particular circumstances. Take care, so as to avoid losing important assets.