People with damaged credit always see their options limited when it comes to securing a loan. Like everybody else, they have two options: choosing between a secured and unsecured loan. While lenders offer high interest rates to bad credit borrowers for both loan types, secured personal loans typically features better terms, as they offer longer periods for repayment and lower payments, when compared to unsecured loans.
When applying for loans designed for bad credit borrowers, you would have to choose between shorter-term unsecured or longer-term secured loans. When it comes to history of bad payments, more restrictive terms, applicable to rates, length, and loan amounts should be expected by a borrower. However, such loans are specifically designed for those, who desire to get back on track financially and leave past credit problems behind. You should research both of these options before considering one of them. More detailed information on each kind of loans is presented below.
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Secured Personal Loans
Secured loans are safer from the perspective of a lender, as they have more guarantees to recover their losses should a default happen. They all have one major requirement in order to be underwritten. You have to come up with collateral whether it be a car, a house, or any other asset that may be sold by a lender should you fail to repay the loan. While this may seem a major drawback by many borrowers, the advantages are numerous. You will be able to bargain longer terms and lower interest rates, securing a lower monthly payment, and, possibly, a higher loan amount. Presence of collateral may also be a turning point in approval decision should your credit history be really bad.
Should you not be able to repay the loan, a lender would take a possession of an asset, presented as collateral, and sell it to pay off your loan balance. Repossession, however, presents a big risk to lenders, since in many cases a selling price is not enough to cover the loan in full and further collection activity may be needed on their part. Secured loans could be a great borrowing tool for some people, while other may not be comfortable with it.
Unsecured Personal Loans
There are available options to get a loan for those who have nothing to present as collateral. Such loans, commonly referred to as unsecured personal loans or signature loans, present a higher risk to lenders, compared to secured loans, since there is nothing to fall back on should a borrower seize payments on a loan. Lenders try to offset such risks by raising interest rates and shortening loan terms. Such activities usually mean higher monthly payments to borrowers. These loans are great for those who have nothing to present as collateral and the ones who can prove they can handle high payments. Such loans, however, are not as easy to get as unsecured loans for people with bad credit.
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