What is a secured loan?
A secured loan (also known as a homeowner loan) is when you borrow money and use your house as security against the loan. This would mean if you did not keep up with the payments on your homeowner loan, your property could be at risk.
A homeowner loan usually has a low minimum loan amount, such as £3000 and has a lot lower rate of interest compared to an unsecured loan. This is because the companies that lend you the money see you as a lower risk over an individual that is renting their property.
What can I spend my loan money on?
The most common uses for secured loans are:
- Home improvements
- Debt consolidation or debt repayment
- A new car or van
- Wedding
- Holidays
Secured loans typically last for between 1-25 years.
Secured loans are often known by a variety of different names. In essence, they are all the same thing. Other names for secured loans are:
- Debt consolidation loans.
- Homeowner loans.
- Home equity loans/house equity loans.
- First charge mortgages (if you do not currently have a mortgage on your property).
- Second charge mortgages.
- Second mortgages.
Secured loans advantages and disadvantages
Secured Loans Pros (Advantages)
- You will pay a lower interest rate compared to an unsecured loan.
- You are more likely to be accepted, even if you have a poor credit rating/poor credit score.
- The application is quick and easy.
- Affordable monthly repayments.
- Pay back through a simple, single direct debit payment every month.
- The approval rate is often higher compared to an unsecured loan.
- The maximum loan amount available is often a lot higher than other loans.
Secured Loans Cons (Disadvantages)
- If you do not maintain your monthly repayments, your property will be at risk.
- Some secured loan companies charge arrangement fees and other charges, make sure you understand all of the fees involved before applying for your loan.
- Some homeowner loans come with a variable rate, which could make your repayments higher or lower in the future.
Things to consider before you apply for a homeowner loan
Before you hit the apply button, you need to be 100% confident that you will be able to keep up with the payments even if you become unemployed or your relationship status changes. We often hear stories about peoples personal circumstances changing which leads to difficult financial times. So when you compare secured loans, make sure this is at the back of your mind. Always have a backup plan! This could be covered by an insurance policy or a family member, just make sure it is covered.
Here is a list of changing factors, which could impact your ability to repay your secured loan:
- Your employment – if you were made redundant or lost your job, would you be able to continue to make regular monthly payments into your loan? If not at the moment, it would make sense to get a reserve fund or insurance policy in case this happens.
- Your relationship – do you rely on your partner or housemate to pay bills? If so, what if they were not around any more? Would this affect your ability to repay your new loan?
- Your health – if you become ill or unable to work, could you still make repayments to your loan?
- Your credit scoring – if you started to miss payments on this new loan or any other repayment and your credit rating dropped, would your new inability to get credit affect your ability to pay this loan?
Why is this important?
It is important because if you do not keep up with your repayment, you have agreed to use your home as security. This shouldn’t be taken lightly, so please ensure you have considered all possibilities before applying for a secured loan.
The best secured loans
If you want to best secured loan, it is important to shop around. Just like any financial product, the market is very competitive and there are some amazing deals out there. Although your current bank or mortgage provider may seem like an easy option (and sometimes the best one), we would always recommend that you compared all secured loans available in the UK as the differences in rates and charges may surprise you.
This could impact your ability to repay your loan, a cheaper loan repayment would leave you with more spare money for other activities, so choose wisely!
I am very familiar with The Civil Enforcement Association and the High Court Enforcement Officers Association and I have written extensively on Financial Services matters.
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