Renters don’t have access to one of the cheapest loan types available, home equity loans. They are cheap, tax deductible, and offer flexible terms. As a renter these secured loans may be out of reach, but are unsecured loans the best source of funds for a renter?
A secured loan is a loan that has a form of collateral securing it. The collateral is forfeit in the event that the loan goes bad. As a result, secured loans tend to be safer for lenders and therefore cheaper to borrowers.
An unsecured loan, by contrast, is a loan that has no underlying collateral. This is like a credit card, there is nothing securing the debt. In the event of default the lender cannot come and take away the collateral.
Without a home renters lack an important asset that can be used as collateral. That does not mean that they have nothing that can be used as collateral. A car, a boat, a savings account or certificate of deposit- all of these can be used as collateral for a loan.
By having a secured loan you are typically able to secure a better rate than an unsecured loan. Unsecured loans are not the best source of funds for renters, but they are a great source.
An unsecured loan puts none of your assets at risk. In the event that you find yourself unable to pay back the loan you will not be faced with the repossession of one of your assets. Considering the trauma of having your home foreclosed upon, the ability to avoid risking collateral is a good thing.
If there is simply nothing that can be used as collateral, an unsecured loan will at least allow you access to a pool of funds. In the event of need this can be a valuable asset.
The easiest way to gain access to an unsecured loan is through a credit card. Relatively speaking, a credit card is much easier to get than an outright loan. A credit card will also provide a revolving source of credit, that is, as you pay back what you owe it becomes available to borrow again. With a loan this is not the case.
The drawback of a credit card, however, is that it typically comes with a higher interest rate and the fees can be substantially higher (late fees and over-the-limit fees).
If an unsecured loan is really what you are looking for, shop around for the best rates and terns. Don’t settle for just anything and inquire with your lender if you can get a better rate with a co-signer or by having a bank account.
Leverage all of your possibilities to get the best rate and terms possible.