Why Do Banks Prefer Secured Loans?

A secured loan represents a much lower risk for a bank when lending to borrowers. Secured loans essentially come down to whether you can lower the risk of taking a loan out for a bank by using an asset as something that can be sold by you, or repossessed and sold by the bank as a way of ensuring that the original loan, and any interest is repaid. It’s worth looking in more detail at why banks prefer secured loans, the types of secured loans available, and how you can get a secured loan in spite of a poor credit history.

1 – The Risks

Any type of loan for a bank represents a risk that has to be mitigated, either through the use of high interest charges, or through the use of collateral by the borrower to lower that risk. An asset such as a house is ideal for a bank, as it shows that a borrower is serious about repayments, and willing to offer up something of high value to cover the loan in the case of a failure to make payments.

In this context, a bank is often willing to provide much lower interest rates and longer term repayment schedules for secured loans, as the general level of risk is greatly reduced. By comparison, an unsecured personal loan made without assets carries more risks, and requires a bank to use interest rates, late penalties, and legal action to ensure that repayments are made.

2 – Types of Secured Loan

There are four basic types of secured loan that are offered by a bank: a mortgage loan, whereby property is used as the key asset for the loan; a nonrecourse loan, whereby the bank only agree to pursue repayment up to the value of the property. A foreclosure loan is specific to the recovery of a house for repayment of a loan, while a repossession loan is where any type of property, whether a house or jewellery or car, acts as the collateral. In all of these cases, the borrower agrees that their asset will act as the security for the bank or lending agency, and demonstrates that they understand the risks involved in doing so.

3 – How to Get a Secured Loan Without Assets and a Poor Credit History

Many people struggle to get a secured loan because they don’t have significant assets, or have a poor credit rating that makes it difficult for them to receive approval for a mortgage loan. In this case, they may have to resort to unsecured personal loans at high interest rates, and with shorter contracts and more fees. A borrower can, however, apply for a secured loan through the use of a guarantor.

A guarantor loan involves a third party, typically a parent, sibling or other family member, acting as the security for the loan. The guarantor is ideally a property owner that can agree to repay the loan, using their property as an assurance. Banks can then lower the risk on giving out a loan to a borrower with poor credit, and lower interest rates can be achieved. The borrower’s own credit rating can be improved over time, raising their capability to take on further secured loans against an asset.

Written on behalf of GBP Loans Ltd, UK based provider of both guarantor and secured loans. Contact GBP Loans or apply online for a quick approval with same day payout!

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