Which loans carry the least risk?
Last Modified 16th of February 2021
When looking for a loan, it’s important to weigh up different kinds of risk. The level of risk attached to a loan can be thought of both in terms of the risk for the lender, in the sense of whether they feel you can repay the loan, and the amount of personal risk that you want to take on. This risk might mean anything to being able to cover long term repayments and interest, through to whether you’re prepared to put up a significant asset as security for the loan. It’s worth, then, looking at the different kinds of loan to work out which ones carry the least risk and what to avoid.
Unsecured personal loans vs secure loans
An unsecured personal loan can be low risk if the right terms and conditions are met. In general, an unsecured loan is offered without using an asset as collateral and comes down to whether or not you can pay back the loan with interest. The risk is divided between your capacity to pay and the lender’s flexibility. In terms of what you stand to lose, the risk is you may not be able to keep up with payments in the future.
By contrast, a secured loan can be less risky in terms of future payments, but throws up some alternative risk. Effectively, the loan is secured against a valuable asset, in most cases a home. When you take on a secured loan, you can receive low interest rates and a long term repayment schedule, but with the knowledge that an asset may be foreclosed on, or even repossessed, if you fail to make payments. The same risk also applies to when you borrow against any equity that you may have built up on your property.
Lessening the risk
It is possible to lessen the general risk attached to an unsecured and a secured loan. In terms of unsecured loans, this can be achieved by finding a guarantor for the loan. A guarantor is typically a family member or a spouse that can provide assurances to the lender that they will repay the loan in the event of you defaulting. You still have to pay, but have backup in the event of problems. This means that risk is spread out and more favourable lending terms can be agreed.
You can also lessen the risk of a secured loan by being as careful as possible when negotiating with a lender. This is particularly important when borrowing against your home, and should involve a sensible lending plan. Moreover, you can simplify multiple loans by taking out a debt consolidation loan against your property. This kind of loan retains the risk of a secured loan, but means that you can reduce the amount of lender demands on you.
High risk loans to be wary of
It’s worth reviewing some of the higher risk loans to be wary off. These tend to be ones that seem to have the least strings attached, at least initially. For example, a payday loan, where you receive a cash advance that is paid off at your next payday, can lead to long term debt problems if you default, and has a very high APR. Moreover, a buyback scheme with a pawnbroker on valuable items, which provides another short term loan, can also lead to problems in terms of losing your assets in the event of missing payments.
Author Bio: Liam Ohm is a regular writer for numerous finance blogs. He has a real passion for loans and giving financial advice to those who need it.