Finance

How Does a Secured Loan Work? 

Wooden scales balancing a money bag and a cut-out house

Thinking about borrowing a substantial sum to do some work on your home or to make a major purchase? Perhaps you need to consolidate your debts and are wondering how to achieve this? A secured loan could be what you are looking for.

Looking to make some home improvements or buy a new car? A secured loan could help. We explain how they work.

Thinking about borrowing a substantial sum to do some work on your home or to make a major purchase? Perhaps you need to consolidate your debts and are wondering how to achieve this? A secured loan could be what you are looking for.

What is a secured loan?

A secured loan is borrowing that is secured on an asset such as your home. Typically you have to be a property owner and have equity available in your home, so it’s sometimes also known as a home owner loan. Using your property as security for the loan enables you to borrow larger sums of money over a longer period – generally £15,000 or more - and at lower rates of interest. In some cases the collateral used could also be your car or valuables, such as jewellery.

It’s important to remember that the borrowing is secured on your property, so your home could be at risk if you are unable to make the repayments. In the worst case scenario, the lender could repossess it in order to recover their money.

What types of secured loans are there?

There are a number of different types of secured loans. These can include mortgages, bridging finance, home improvement loans, equity release loans, lifetime mortgages and debt consolidation loans.

How do they differ from unsecured loans?

Unsecured borrowing is not tied to an asset such as your property. As such, it is a riskier investment for a lender because there is no collateral involved, so the interest rates tend to be higher, the repayment periods shorter and the amount you can borrow smaller.

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Can I take out a secured loan if I have a bad credit history?

If your credit history is poor, you may actually find it easier to take out a secured loan than an unsecured loan. This is because securing the debt on your home or other assets makes it a less risky proposition for the lender.

How much can I borrow?

This will depend on your credit rating, how much you earn and how much equity is available in your home. But generally, with a secured loan you may be able to borrow any figure from between £5,000 and £100,000.

How long will I have to pay it back?

Unlike unsecured loans, which typically have repayment periods of one to five years, you can repay a secured loan over five to 25 years, which can make the debt less onerous and spread out your repayments. Nevertheless, it’s worth remembering that you will also be paying interest over the same period on the loan. So it could also make the debt more expensive over the long term, especially if it is for a relatively small amount and you are paying interest on it over 25 years.

What are the alternatives to a secured loan?

Before you secure any new borrowing on your property, it is important to consider alternative options in case they are more suitable for your needs and more cost effective. For example, if you have equity in your home you could consider remortgaging as it often makes more sense to extend the existing debt you already have on your property.

If the sum you wish to borrow is a relatively small amount you may be better off taking out an unsecured loan or borrowing the money on a zero interest credit card or via an overdraft, which you could pay off over a shorter time period. It’s worth considering the total cost of the loan over the whole repayment period, as well as affordability.

An unsecured loan or credit card debt will not be secured on your home. However, you will need to have a good credit history and may only be able to borrow up to £20,000.

An additional alternative to a loan secured on your home could be a guarantor loan. In this case a family member or friend guarantees your borrowing and may be asked to pay back the loan if you fail to. They may need to be a homeowner and prepared to provide their own property as collateral.

Always take your time and get specialist advice before taking out a loan secured on your property. Make sure you are confident you can afford the repayments over time.

by Piper Terrett, Fluent Money Group - July 2021

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