In times of emergency, many people will seek emergency loans to help sought things out. For the most part, the most popular loan type is the unsecured loans, whereby if you are eligible, you get cash quickly without having to provide any kind of collateral. In light of this, many people will overlook the secured short-term loans. However, in many instances, the secured loans option tends to be the better option.
This read will delve into both types of short-term loans with the sole purpose of comparing both loans as well as determining which of the two loans types is the better option. To compare, we will look at some of the loan characteristics.
#1. Interest Rates Comparison
When taking up a loan, the very first thing that you need to consider is the loan interest that you will end up paying. Everyone looks to reduce the financial burden of the loan they take by seeking loans that charge the least interest rates possible.
With regards to secured and unsecured short-term loans, they differ considerably. In the case of unsecured loans, the interest rates are usually high. The underlying cause for this is the fact that you do place any of your properties as collateral. As such, these kinds of financial products represent an enormous risk for the product provider.
In the event of defaulting on the loan, lenders have limited ways (usually going to court) of recouping their investment, let alone the making a profit on the investment. As such, they will charge a higher rate to reflect the higher level of risk they face.
On the other hand, when you offer some kind of collateral, lender have a means of recouping their investment. All they have to do in repossess the property you listed as collateral. The sale of the property will recover the investment as well as some (if not all) of the profits they stood to make. As such, short-term secured loans tend to have lower interest rates.
#2. Fixed vs. Floating Interest Rates Comparison
Short-term loans also differ with regards to the type of interest rates applied for each kind of loan. Typically, the secured variety will offer fixed interest rates. This is important when it comes to planning for the loan financing as it has month-over-moth consistency rates. The interest due on the loan does not change regardless of market movement as they predetermined at the time you seek the loan.
On the other hand, an unsecured loan is offered with adjustable or floating interest rates. This means that the interest rates will be pegged on an index and thus vary according to the market fluctuations. As such, unsecured short-term loan tend to have an inherent uncertainty. When the index goes up, so do the interest rates and vice versa. Therefore, it is usually difficult to plan the financing of your loan payment due to this uncertainty.
Additionally, the fluctuations tend to cause a rise in the interest you end up paying, thus making short-term unsecured loans more expensive than the secured one.
As mentioned above, unsecured loans do not require any collateral while the secure variety requires one to place their property as collateral. In this regard, the unsecured loans are better as you do not have to provide collateral to access emergency loans. This makes the process of accessing emergency funds a lot easier and less complicated.
As for secured loans, you will have to provide a title to your home, car, or any other property for you to access the loans. This complicates the process. As such, if time is of the essence, unsecured loans that do not require the processing of the title are far better.
Contrary to what many people think, short-term secured loans are far better than unsecured short-term loans. As we have seen, by providing collateral, you are able to reduce the interest that you pay while repaying the loans. Additionally, you are better placed to plan for the loans due to the stability brought about by having fixed interest rates. However, if you do not have property to put up as collateral for your loan, the unsecured option is the better option.
In a nutshell, whenever you seek short-term loans, analyze your needs and your case on an individual case and situation basis.