Secured Loans – The Pitfalls
Taking out a loan for a small amount to pay for a purchase that is just outside your usual spending power should be quite a manageable situation. If you take the loan out at a reasonable rate of interest over a decent term then you should be able to make the repayments even if you find yourself out of work for a period. However it is a different story if you take out a mortgage to pay for a house, or a car loan. These forms of credit are often “secured” on your purchase, which means that, should you default on the loan, the lender will be able to reclaim the property from you as a way of making their money back.
Secured credit has such pitfalls because, without the possibility of reclaiming their money in this way, banks would need to charge higher rates of interest and keep the term of the loan much shorter than they currently are. This would put the purchase of a house or a new car far outside the range of most people. It is, however, vitally important to be sure that you have a contingency plan should you suddenly lose your job. In such cases, becoming unemployed can also mean becoming homeless.
Further to this, a default on a mortgage can stay on your credit file for some time, meaning that another mortgage any time soon will be an impossibility for you. Take into account all the perils of taking a mortgage before you sign any documents, because the drawbacks to secured credit could be prohibitive.