Secured loans: what are they?

What is a secured loan?
What is a secured loan?

This secured loans article was kindly co-written by Jason Davis & Sarah Taylor who are both finance brokers at secured loan comparison website Lending Expert. For more details view the website right here: https://www.lendingexpert.co.uk/loans/secured/

A secured loan lets the borrower take an amount of money secured against a property. Such loans may also be referred to as homeowner loans as these require the borrower to own a part of your house in order to qualify for the same. However, you can also secure a loan against a possession other than a property.

For the purpose of securing the property, the lender may use a second charge, which ranks after the principal mortgage and is a legal arrangement that is registered with the Land Registry. Qualifying for a secured loan is comparatively easier than personal loans, because the lender can always get their money back.

Even if it’s hard for you to find the amount, you assure the lender of paying them back by securing the loan. This, in turn provides a good security to the lender and thus, also gets you certain benefits. The benefits might range from a larger amount of borrowing, a longer term of borrowing, or a reduced repayment interest rate.

In order to provide for huge set-up costs, the lenders offering secured loans prefer the loans to last longer. The total term of the loan can range between 5-25 years, which may also be higher in specific cases. You need to make regular monthly repayments throughout the term and a default on the payments could lead to you losing your property.

When To Opt For A Secured Loan ?

In UK, if you are a homeowner or a mortgage paper who is looking for borrowing a large amount of money as compared to a regular personal loan, generally up to £250,000, then you may opt for a secured homeowner loan. In order to use as a security against the loan, borrowers are likely to build an equity in their homes. Your credit history, the equity that you have in your home as well as other personal circumstances, all determine the amount you can borrow, the interest rate as well as the concerned term.

The Possible Uses Of A Secured Loan

Unless, it’s not utilized for a commercial benefit or an illegal purpose, the money borrowed as a secured loan can be used for whatever you want. Some borrowers use secured loans for the purpose of funding home improvements, or for a debt consolidation, whereas others might use it for making a large purchase, such as buying a car.

You might decide that you want to add value to the property itself, perhaps by building an extension or conservatory. Other borrowers may plan to cut the cost of existing, expensive credit card debt and smaller personal loans by repaying them all with a low-cost secured loan. This also means they only have one monthly payment, making their debt simpler to manage and budget for.

Factors To Consider While Taking A Secured Loan

Before taking a secured loan, you need to consider a number of factors, including:

Low Headline Rates : By law. the low advertised rates are to be given only to 51% of the selected applicants. The remaining 49% applicants who are successful are likely to pay a higher rate, while the rest may be turned down by placing a mark on their credit records.

Eligibility : Your place of residence and age may be some of the most important eligibility terms for taking a secured loan. Mostly, you must have been a resident of UK for a period of at least 3 years, have a regular income and own a current account.

Early Repayment Charges : Repaying a loan early may lead to a penalty being charged by some lenders as it eliminates the interest they would have otherwise earned. Usually, depending on the notice you give, these charges are equal to the interest of 1-2 months interest.

Additional Fees : Make sure you study the terms and conditions for all additional fees, including arrangement fees and same-day transfer fees. A usual transfer may take about 2-3 working days.

Payment Holidays : Payment breaks may be offered by some lenders, which can prove to be a beneficial option in financial hardships. But, the interest will be charged later with an increased amount of the total repayment.

Second Charge : If you default your loan, the lender may take you to court in order to ask for a house repossession, which is the second charge on your property. A second charge lender takes whatever is left, up to the value of the remaining debt, after the first charge lender has been paid back.

Variable Interest Rates : Usually, the interest rates associated with secured loans are variable, which makes it quite a tough job to budget the same. Make sure you can afford such fluctuating rates as they might even hit twice the regular rates if you have also taken a variable rate mortgage.

Consolidating Debt : Consolidating debt can be a nice way to get you out of trouble in the short term. But, lowering your monthly repayments for a considerably longer period may make you pay a higher amount in the long run.

Alternatives

Unsecured Loans

If you are looking to borrow a small amount of money, a good alternative to these loans is an unsecured loan. Borrowing a smaller sum is surely worth weighing up the negatives and positives associated with low APR cards, zero percent credit cards, and agreed overdrafts, while the options for peer-to-peer are surely worth gaining a deeper insight into.

Remortgage

In case, you are seeking to secure a heavy debt against your property, you must consider the possibilities of opting for a remortgage in place of a secured loan. Instead of taking out an extra loan, a mortgage may make sense when it comes to consolidating your debt in such a product.

Make sure you have enough equity in your property for releasing some money and still qualifying for another mortgage. Also, it is advised to know about any high upfront fees and the increased cost of the debt if you extend the term of a mortgage. An extension may also require you to pay the interest for a longer period.

Special thanks also to Cocotero Secured Loans for their help with this article.