Summary of this article
While secured loans have always proven to be efficient in terms of cost savings, every borrower must diligently weigh the pros and cons based on their financial history.
With rising interest rates and uncertain income, one must understand their risk management with factoring in the purpose of borrowing and tenure.
If the objective is to meet a short-term need while preserving liquidity, a shorter-term or unsecured borrowing option may be more appropriate.
Ideally, a secured loan against assets like property, gold or securities is a prudent financial choice over an unsecured loan for a borrower when he/she is looking for a cost-effective funding option and at the same time requires a large amount with longer tenure and manageable repayment.
In the case of a secured loan, collateral reduces the risk of the lender and, therefore, is normally priced significantly lower than unsecured loans. In addition to this, since the lender has reduced risk in case of a collateral-backed loan, it is particularly useful for the borrowers with a moderate credit score and erratic cash flows as their chances of approval increase in secured loans vis-a-vis unsecured loans.
“A secured loan also makes more financial sense than an unsecured loan as it gives the opportunity to the borrower to unlock the value of their asset and at the same time keeps the ownership, potentially avoiding losses or tax implications. For long-term requirements like business expansion and structured financing, lower interest rates and higher tenure will materially improve financial efficiency. Furthermore, lower EMIs will enable cost preservation and create the positive cash flows in multi-year horizons,” says Simranjeet Singh, CEO - SME & Retail Business, Anand Rathi Global Finance.
While secured loans have always proven to be efficient in terms of cost savings, every borrower must diligently weigh the pros and cons based on their financial history. The borrower must assess two important aspects while making the decision to opt for a secured loan. The first aspect is to analyze their financial resilience. The loans which have asset backing provide affordable payments together with controlled monthly installments, yet they create a possibility of losing assets when borrowers fail to pay their loan obligations. Therefore, repayment stability is the key. Borrowers with stable and predictable income stand to benefit from availing a secured loan.
The second important aspect to consider while evaluating the options is the importance of the pledged asset. “Losing a critical asset of immense emotional and strategic value like a residential family home in case of default could have dreadful implications and would wipe out the savings done by opting for lower interest cost. Therefore, self-assessment of the borrower is of paramount importance when evaluating a trade-off between lower funding cost and potential risk of losing an important asset,” says Singh.
With rising interest rates and uncertain income, one must understand their risk management with factoring in the purpose of borrowing and tenure.
“If the loan is meant to create long-term wealth and generate stable income, opting for a secured loan with a longer tenure and flexible repayment options may be justified. However, if the objective is to meet a short-term need while preserving liquidity, a shorter-term or unsecured borrowing option may be more appropriate,” suggests Singh.
The appropriate loan selection depends on what the borrower can afford and their preferences for taking financial risks. People who have regular income and enough money can choose secured credit because it provides affordable rates, but others who have unpredictable earnings and limited funds should pick unsecured personal loans although they come with higher expenses. The primary purpose of borrowing needs to support your financial path which extends into the future while keeping your money safe from any additional dangers.
