Making use of loans can help you to tide over your finances in a pinch. Whether it’s a late paycheck, unexpected bill or emergency repairs, there are a range of loan products available to provide help.
However, sometimes we can want to switch out the type of loan in use if we feel another could work out better. If you’ve got an unsecured loan and would like to consider swapping to a secured loan, here’s what you need to know.
The difference between secured and unsecured loans
An unsecured loan is lending agreed in good faith, where you pledge to make repayments in order to cover an amount borrowed plus interest.
A secured loan is the lending of funds which are backed by financial assets you own, such as a car or your home.
The main difference between the two is that secured loans require assets as a way of securing the funds, while unsecured loans are based solely on affordability and an assurance that you will pay it back in regular instalments.
Is it possible to switch from an unsecured loan to a secured loan?
The short answer is yes – you can move from an unsecured loan to a secured loan if you would want to.
You can’t simply secure an existing unsecured loan that you have though. You can borrow money using a secured loan in order to pay off your outstanding unsecured loan. This way, you only need to think about your new secured loan going forward.
People usually make this switch using a secured homeowner loan to get the funds required to pay off their previous loan.
When is it best to switch to a secured loan?
There are a few situations in which moving from an unsecured to a secured loan can be a useful financing option.
It can sometimes be a viable solution used to consolidate debts on credit cards and bills if you have fallen behind on repayments to prevent additional fees from mounting up. This allows you to pay off your outstanding debt and leave you with a single entity to repay.
Secured loans can also allow you to simplify your finances into a more affordable situation if the terms of the secured loan are more agreeable. A larger sum of money could potentially be borrowed over a longer term, making your overall repayments more manageable.
You may also have a lower interest rate attached to the new secured loan than you would have previously had on your unsecured one. This is due to the added security that secured loans can afford lenders due to the addition of collateral.
But this is where some of the disadvantages can be found. Making the switch from unsecured to secured means that your assets have been legally tied up in your borrowing. Failure to meet these new repayments could see you home at risk as a way for your new lender to reclaim the money they haven’t been given.
Use loans responsibly
Borrowing money can be a crucial lifeline when life throws the unexpected at you. It is important to thoroughly check the terms of any loan before agreeing to the repayments. Consolidating your outstanding finances using a secured loan presents some people with a way forward – just be sure you understand the terms surrounding collateral first.