What is the Safest Loan to Take?

So, when it comes to borrowing the safest loan type you can take out can really vary depending on what your meaning of the word safe is. Depending on what your opinion is, there are different associated risks with different types of loans. Certain loans carry more favorable risk for repayment while other loans carry more interest rate related risk.

Variable Interest Rate Risk

There is quite a big risk associated with taking out a loan that has a variable or adjustable interest rate. This means that the interest rate could change at any time (this will however depend on the specific terms of the loan). Credit cards are typically known for having a variable rate but these can appear anywhere and on loans as well, even on mortgages. Many commercial loans have an ARM (adjustable rate mortgage) and these types of loans were commonly given out during the Great Recession as well.

Collateralization Risk

Any loan or debt obligationthat is secured to property or an asset has an associated property loss risk. If you are unable to repay what you borrowed on a secured account you won’t be able to keep your property and it will eventually be foreclosed, repossessed or auctioned off in order to recoup the debt. This is what happens when debt obligations are “collateralized” and this carries its own type of risk. Everyone has their own risk appetite and due to this some people feel more at ease with secured loans while others feel more at with unsecured loans.

Interest Rate Risk

There is often risk associated with the associated interest rate your pay on your current debt obligations. Paying too much in interest carries its own set of risks and could mean you will likely have to refinance down the road in order to avoid interest payments. It could potentially make you liable for refinance fees or origination fees and could potentially mean you risk exposing yourself to financial losses due to the burden of high interest rate payments.

Are Secured or Unsecured Loans Safer?

The answer to this question it will depend on who you’re asking. For the lender, the safest type of loan to give out by far is going to be secured loan options. Secured loans have a higher likelihood of repayment due to them being secured to collateral. On the other hand, these loans tend to be bigger in size so there is a limit to how many they can fit into their lending portfolio and book of assets. For consumers there is less associated interest rate risk with secured loans but if they are unable to repay they run the risk of losing property. So, it really does depend on what kind of consumer you are and your ability to repay. If you think you have a higher likelihood of repayment it should always behoove you to go with a lower interest rate option. If not, you might consider an unsecured loan option. If you think your ability to repay is somewhat shaky, you should reconsider the loan you are taking out. However, you should still opt for a path that might have more flexibility and is not secured to any assets. Hopefully you are not taking out a loan with the intentions of defaulting, but life can happen and it’s always important to think about the possibilities that default could potentially occur.