Secured Loans

Comparing Repossession in Secured and Unsecured Loans

Both secured and unsecured loans involve penalties to the lender for defaulting on repayments. With a secured loan, these penalties may be more severe, as the property you used to guarantee the loan may be repossessed. Because unsecured loans are not guaranteed by a valuable personal asset, the threat of property repossession is not a factor, in most cases. However, some lenders may go to court to have property repossessed if a borrower defaults on an unsecured loan.

With either a secured or an unsecured loan, you may reduce the risk of repossession by communicating with your lender if you have financial difficulties. Most lenders are not keen on going to the trouble and expense of repossession, and they may be willing to make arrangements to receive your payment late or lower your interest rates to make repayments more manageable. A lender may even agree to accept smaller repayments for several months rather than having you default on the loan altogether.

Secured Loan Guarantees

Secured loans are guaranteed by a personal asset, such as a car, an automobile or a boat, which has sufficient value to recompense the lender if the borrower defaults on the agreement. When you sign a lending agreement with a financial institution, you agree that the lender may take possession of the property if you fail to keep up repayments. The lending agreement should set out the terms and conditions for the loan, including how and when the property may be repossessed.

Although a borrower faces the risk of repossession with a secured loan, secured lending agreements offer certain advantages. Because a secured loan is guaranteed by collateral, you may often qualify for a larger loan than you might otherwise afford. In addition, you may be entitled to lower interest rates and a longer repayment term when you secure a loan with collateral. Borrowers who have a history of adverse credit may find that they are able to qualify for a secured loan if unsecured loans are not available.

Lenders have certain requirements about the type of property used to secure a loan. In general, financial institutions prefer that loans be secured with a house or other property that can't be moved. Some institutions will accept cars, boats or recreational vehicles as collateral; however, interest rates may be higher and loan amounts may be smaller. When you take out a loan to buy a house or a car, the loan is usually secured by the property itself. With these loans, the property to be repossessed would be your home or vehicle.

Repossession and Unsecured Loans

Unsecured loans are not guaranteed by collateral, but by your credit history and your income. In order to qualify for an unsecured loan at a competitive interest rate, most lenders will require that you have a strong financial profile. Specialist lenders may offer unsecured loans to borrowers with a poor credit history, but interest rates may be quite high, and repayment terms will be less favourable than terms for a secured loan.

According to the original terms of an unsecured lending agreement, your house, car or other property cannot be repossessed if you default on your repayments. However, some lenders will take a debtor to court if the loan is not repaid. A creditor may take out a charging order through the courts, which means that if your property is ever sold, the creditor will be repaid out of the proceeds from the sale. As you are comparing repossession in secured and unsecured loans, bear in mind that both types of loans involve the risk of having your property seized to pay off a creditor.