Secured loans allow individuals (even ones that have a somewhat poor credit rating) to borrow large amounts of money. This is due to the fact that banks require everyone who wants to get a secured loan to offer collateral. In most cases, the collateral is in the form of a car, your house, or a possession that is of equal or greater value that then loan. In the event that you are unable to repay the money, the bank is entitled to take possession of your property.
This having been said, losing your property is often a worst-case scenario that can be avoided if you take a few simple precautions. Keep in mind that some of these require effort in the long-term while others can be checked off the list right before submitting your request. Here is what you need to do in order to safely take out a secured loan:
Improve Your Credit Rating over Time
One of the most important things that you should do before applying for a secured loan also requires the least amount of time, but the highest level of commitment. All lenders will look at your credit rating when determining what kind of terms and conditions they will offer you. Unfortunately, your credit rating must be built over time, which means that you have to constantly make sure that you repay your loans on time, and have an overall good relationship with lenders.
Generally speaking, you can improve your credit rating by not submitting too many loan requests in a short amount of time, taking out loans that you repay on time, having financial stability, and not changing workplaces too often, among others.
Repay Your Other Loans or Consolidate Your Debt
Secured loans are serious long-term financial commitments. If you intend to request one from a lender, make sure that any other debt that you may have is not too expensive. If you are already making monthly payments form other loans, it may be difficult to also repay the money from the secured loan. Repaying or consolidating other debt that you may have will make it easier to repay the secured loan while also increasing your credit rating.
If you have credit cards that you use on a daily or weekly basis, try paying them off before getting the loan. This will increase your credit rating and enable the lender to give you a slightly lower interest rate. Furthermore, avoid taking out payday loans at least 5-6 months before applying for the secured one.
Create a Safety Buffer in Case You Are Laid Off
If you do not have any guarantees that you will maintain the same workplace AND income for the full duration of the loan, create a safety buffer that will enable you to keep making the monthly payments even if you were to lose your job. Ideally, this buffer should be a bank account that will contain the equivalent of 2-3 months’ repayment instalments.
Determine What Refinancing Options You Will Have in the Future
In the event that you may not be able to repay all the money on time, look at what refinancing options you will have. This is usually best done through personal research. In some cases, if you ask the lender what refinancing options you would have may lead to them believing that you do not expect to be able to repay the money.
Shop Around and Be Smart When It Comes to the Collateral
Lastly, look at the offers of multiple lenders before applying for a loan and try to find one that will give you more flexibility in terms of collateral. Where some banks may only give you a secured loan if you put up your home as collateral, others may accept other guarantees such as rural property or vehicles.