A secured loan, sometimes referred to as a ‘second charge mortgage’ or a ‘homeowner loan’ is a way of borrowing a lump sum of money from a lender which is secured on your property, using your home as collateral. The obvious risk involved in this is that if you fail to make payments your home could be repossessed. However, there are a multitude of benefits which make this one of the more effective methods of borrowing money.
Low Interest Rates: The risk for the lender is lower than an unsecured loan i.e. a credit card or personal loan, as there is tangible property as collateral. This means interest rates are lower and you can spread payments over a longer period than typical unsecured loans which tend to be short-term. Secured loans can range anywhere from 5 to 40 years to pay back, spreading out the monthly payments and making it more manageable.
Higher Loan Amount: A typical secured loan amount is between £10,000 to £25,000, which is generally higher than the loan amount available on a credit card for instance. This gives a far greater scope of ways in which you can utilise this loan, which brings us to our next advantage:
Variety of Uses: There are some restrictions on what a secured loan can be used for, but most people may wish to use this to consolidate debts, raise funds to gift, purchase an investment property, or renovate their home. This last option is a wise way to use this loan, as a home renovation could increase value and ultimately make you a profit. For example, if you were to raise the value of your house by £30,000 through improvements, this extra £30,000 would be your profit on top of your existing equity once the loan is paid off. Another smart use of a secured loan would be to raise a deposit for purchasing a second property, perhaps on a buy to let basis which could pay for itself in a matter of years from rent payments.
Help to Repair Bad Credit: A secured loan is one of the easiest methods of obtaining financing, as you do not need a perfect credit score to qualify. Some people may therefore wish to pay off outstanding debts or consolidate them into a single, more affordable payment. If all payments are met, and sometimes even overpaid, this is an effective way of improving your credit rating due to the longer payment window, building up a strong history of meeting these payments monthly.
Cheaper than Remortgaging: Often borrowers will find themselves tied into their mortgage product with high exit charges, so if you are thinking of remortgaging for cash, taking out a secured loan might be a smarter way to go.
Things to Consider: All of this is not to say a secured loan is right for everybody; there are a few factors you should consider carefully before applying for one:
– Some secured loans may come with exit penalties, which will be worth looking into if you want the option of paying off your loan early.
– Fixed or variable interest rates – make sure you are aware if your interest rates are subject to change which could affect your monthly payments.
– Whilst secured loans are available to those with not-so-great credit, it is worth considering how much your credit score will affect the costs as this could incur higher fees from the lender.
If you are thinking of getting a secured loan but are unsure of how to get the best deal, get in touch with us for a free consultation and unbiased and honest advice.