What is a Secured Loan and how can it help me?
A secured loan is where you use your property as security against the money you borrow – using the asset value of your house to show you are not a high risk, making it more secure for the lender. This means that interest rates are usually lower than those for an unsecured loan, and you should have less hurdles to negotiate on the way to getting the loan that will help expand your business, or your house.
However, taking out a secured loan against your home is always a risky proposition, because if you fail to make the repayments, your property could be repossessed.
Most personal loans from a bank or a building society are not secured in this way, but it is increasingly becoming common for those in financial difficulty to use a secured loan to help them get back on track.
- How is interest charged on secured loans?
- How much does a secured loan cost?
- Can you repay secured loans early?
- What happens if you miss a payment?
- What should I watch out for?
Typically, the interest charged on unsecured loans is fixed for the whole period of the loan. The interest charged on secured loans is usually variable, and can shift with the changing tides of the UK base rate, or in line with the lender’s standard variable rate.
Whenever you’re considering a long term loan with variable interest rates, it’s essential you think carefully about whether you’d be able to afford the repayments if interest rates were to rise. If there’s any doubt in your mind, a variable rate secured loan is not appropriate for you. There are some lenders that offer fixed rate secured loans, although the fixed rate will usually only last for a limited period. You should also check the fees and charges, as there can be penalties for paying off your debt early.
As with any loan, there are a number of factors that determine the rate you will be offered. The duration of the loan, your credit score and the amount of equity in your home will all be taken into account. As mentioned previously, secured loans do present a viable option for those with poor credit scores, as the security provided overrides the risk. However, people with poor credit can still expect to pay more for a secured loan.
It is possible to repay secured loans early, but it can be costly. Secured loans are very limited in their flexibility, so even if you have a sudden cash injection from another source, you may not be able to repay your debt early without attracting a hefty fee.
Losing your home is a very real risk with a secured loan. However, generally speaking, it is less profitable for lenders to go to the trouble of repossessing your home, rather than giving you a little bit of extra time if you’re struggling to make the repayments. If you are worried about missing a payment, make sure you contact the lender immediately to explain your situation and possibly renegotiate the payment schedule.
If you miss a repayment, there will also be a negative impact on your credit score. Some lenders will also charge you for producing letters to inform you of arrears on the loan, and this can be added to the cost of your loan with interest.
Go over your plan. At the Mortgage Centres, we take the time to go over your finances with you, and make sure that you’ll be able to meet the conditions of any loan. We help you to see what you can afford, what plans and contingencies you should have in place, and make sure that you’ll be in a comfortable position going forward.