A secured loan is one that is secured against your property. This makes it easy to be approved for a secured loan regardless of credit. The interest rate on such a product tends to be more competitive than with unsecured loans, but obviously carries a significantly higher risk to you the borrower. Before deciding what it is the best option for you, take some time to explore how these loans really work, and also what alternatives there are out there.
Secured loans are often the only way to borrow a significant amount of cash – particularly if you require more than £10,000. The term ‘secured’ simply refers to the fact that your lender will ask that you put up something – almost always your property – as security to cover them should you find yourself unable to repay the loan in full.
Secured loans are therefore far less risky for a lender, which explains why they are often less expensive than their unsecured counterparts. Of course, you must always keep in the forefront of your mind that if you should go on to default, you may actually lose your home.
If you need to raise some money, you could also consider getting an advance on your mortgage. This is simply a case of borrowing some more money from your existing mortgage lender – also secured against your home. This could be a great option if you need to raise some cash for an extension or another form of home improvement or to get access to the money required to put down a deposit to buy a second property to rent out, for example.
If you decide this is a good option, you will find that you are likely to be eligible for a low rate of interest because of the security you are offering in the form of your house or flat. Repayments are generally made on a monthly basis. However, remember that if you don’t have a fixed interest rate, the amount you pay per month could fluctuate.
While this type of loan can be ideal in some circumstances, the risk factor should not be ignored. You could face having your home repossessed should you run into problems further down the line.
It is also worth bearing in mind that quite a number of secured loans come with rather costly arrangement and other types of fees. It’s essential that you include these in your budget. Generally speaking, you should aim to avoid those lenders that charge higher fees. However, in certain circumstances, paying a higher fee at the outset could unlock a lower interest rate overall, so it could potentially suit your needs.
Unsecured loans are rather more straightforward. You simply borrow money from a creditor and undertake to make monthly repayments until the debt is fully repaid. Because you are not required to offer up any security, you are likely to be on a higher rate of interest than with a secured loan. Though your property will not be at risk should you default, there are other legal steps a lender can take. If you should find yourself unable to repay the debt, at the very least your credit rating will suffer. You can receive unsecured funds with a personal loan but you will need to do your due diligence about these types of loans as they are many different types of agreements.