Ten Things You Should Know About Secured Loans
Secured Loans can both be the answer to your prayers and the stuff of nightmares. For the right person in the right circumstances it can get you out of a financial hole or help you buy what you want to relatively cheaply and quite quickly. For the wrong person in the wrong circumstances it can lock you into an expensive long term commitment and even lose you your home.
Here are 10 Things You Should Know About Secured Loans before you sign on the dotted line.
1. What Is A Secured Loan And How Does It Work?
Unlike a personal loan or credit card a Secured Loan actually involves you making a legal agreement about what would happen if you stopped making the repayments, usually the loss of specified property.
The vast majority of Secured Loans are secured on property, which usually means your home, but can be any property that you own including a car, jewelry, shares or in fact, anything of value.
The contract you are signing means that if you don’t make the repayments, then the lender can force the sale of the secured property in order to recover what is owed to them.
Any amount raised over the amount owed is returned to you. If there is an insufficient amount to cover the outstanding debt, then the lender will continue to pursue you for the balance and can even, in extreme cases, force you into bankruptcy.
Never forget that the term “Secured” gives security to the lender – not the borrower!
2. How Much Can I Borrow With A Secured Loan?
Generally speaking, it is rare to find a lender willing to give a secured loan for less than £3k, and there is an argument to say that borrowing less than £10k on a secured loan is not a good idea. Reasons for this can include the fees involved and the fact that better deals can be found on an unsecured basis relatively easily.
At the other end of the scale, the maximums available are limited by the terms and conditions of a particular lender and the valuation of the asset you are willing to put up as security. Amounts up to £100k are fairly common, but loans in excess of that are certainly available.
A secured loan is better utilised for larger borrowing, which means that it is in your interest to do your homework and find the best deal, including interest rates and fees.
3. What Are The Interest Rates On Secured Loans?
Interest rates for secured loans are typically lower than those for unsecured loans. This is due to the less risky nature of the deal as far as the lender is concerned. After all, if there is a default on the repayments, then the lender can recover their money by repossessing the asset.
As of now (September 2017) Interest rates for secured loans can be as low as 3.5%. To get a rate like this, a good credit score would be required. The interest rate available will get higher as the lenders view of the borrower becomes poorer. Those with poor credit scores may also find themselves faced with fewer lenders willing to lend to them. This makes shopping around for the best deal much less of an option.
If you find that you are being turned down, or being offered sky high interest rates, then you need to consider that there is a reason. It may be the time to address the reason rather than take on more borrowing!
One last point, interest rates on secured loans can be fixed or variable. If they are fixed, then you will know what your repayments will be throughout the term. If they are variable, you will have to consider how you will meet the monthly costs if the rate increases.
Secured Loans can be used for virtually anything including financing a business, paying a tax bill, consolidating debt, home improvements, school fees and even your dream (motor) home!
4. What Is A Secured Loan Used For?
Some of the more common uses include debt consolidation, home improvement, business purposes, car purchase, tax bills, transferring equity, the list is a very long one.
The most important thing is to consider a secured loan as part of a portfolio of options. Circumstances may mean that options are quite limited, alternatively, unsecured borrowing or re financing the first mortgage may be better ideas for what you want to achieve.
Consolidating existing debt onto a secured loan is not something that should be done without vary careful thought. The lower monthly repayments may be attractive but take a look at the overall amount that you will repay, not to mention that you have now put your home at risk by putting it up for collateral.
5. Other Names for a Secured Loan
Secured Loans are marketed using a variety of different names, but are broadly the same product. A loan against property.
Some of the more common names used include:
Homeowner Loans, Home Equity Loans, Second Mortgages, Second Charges, Second Charged Mortgages, First Charge Mortgage and Debt Consolidation Loans.
6. Are Secured Loans Fixed or Variable Rate?
They can be either and it is crucial that you find out which yours will be before you sign on the dotted line. Both have their pros and cons and only the borrower will know which one is the most suitable for them.
If it is a fixed rate, then the borrower knows exactly how much will be paid each month and the total repayable. It can give peace of mind. However, if interest rates fall, then a borrower with a fixed rate will continue paying the same amount and can feel as if they have lost out. The other argument is that if the borrower has a variable rate of interest and interest rates rise, then their monthly repayment is going to rise as well.
Always make sure you can afford the repayments on any loan before taking one. Make sure you have understood all the terms and conditions before agreeing to a loan. Consider protecting any loan with life insurance.
7. Do I Have To Pay Any Fees To Set Up A Secured Loan?
Set up fees are quite common with secured loans and vary widely. This is why shopping around or using a broker with access to many lenders is crucial. Set up costs must be included in the APR which is shown for each loan and make it easier to compare loans on a like for like basis.
In addition to Arrangement or Set Up fees, other costs can be incurred such as Early Redemption costs should you choose to repay your loan early, or penalty charges which may be invoked if you miss (or are late) a payment.
A reputable lender will always make their charges known in their terms and conditions. It is really in your own interest to make sure you understand them before you go ahead with the loan.
8. Why Would A Borrower Consider A Secured Loan?
There are a number of reasons why a Secured Loan can be considered. Here are a few of them:
- Secured Loans typically have a lower credit score threshold, sometimes making them easier to obtain than unsecured loans and are a popular choice for anyone with impaired credit.
- The borrowers situation may have changed since taking a mortgage, employed to self employed for instance, ruling out the option of increasing the mortgage further. Secured Loans can be available for people with just six months self-employment.
- The existing lender may have changed its lending criteria and the borrower is no longer eligible for a further advance.
- Secured Loans can be arranged comparatively quickly, which may be an important factor for a prospective borrower who needs to raise funds rapidly.
- Lending into retirement is available with some plans.
9. What Alternatives Are There To Secured Loans?
There are many! It really depends on what the loan is intended for. If the loan is being used for debt consolidation, then all the alternatives should be considered before going down the secured loan route. Generally speaking, putting up your home as security when it has not been at risk before is not the best idea. Unsecured Loans, Credit Card Transfers, Spending Savings, Standard Remortgage and taking debt advice from a debt charity are all avenues to explore thoroughly before taking a Secured Loan.
If the money is to be for home improvement, then interest free credit card deals, unsecured loans or remortgaging are all possible alternatives.
With current Car Finance deals that are available, it is unlikely that a Secured loan will be the best choice for buying a new car, but, in certain circumstances it just might!
No matter what the reason for the loan, a Secure Loan will always be a possibility, however, shopping around and looking at alternatives is crucial.
10. Where are Secured Loans Available?
Anyone that offers financial services is likely to offer Secured Loans. The biggest problem may be trying to find the best deal. As with a lot of finance products, going to just one provider is pretty unlikely to get the best deal. Using a reputable broker as independent research is much more likely to get a better result and possibly save thousands of pounds in the long run.
If you have a specific requirement or question about taking a secured loan why not try our free Bespoke Introductory Service. Just jot down what it is you need and why and we will put you in touch with someone who may well be able to help you!