We explain all you need to know about taking out a secured loan.
A lender who offers secured loans requires the borrower to provide some sort of guarantee for the loan to be reclaimed if regular repayments are not met. In most cases this guarantee is made on the borrower's property, therefore only homeowners are eligible to apply for secured personal loans.
Loans taken out against a property that is owned outright are called first charges, whereas those taken out against a property with an outstanding amount left on the mortgage are known as second charges. This is because if repayments are not met and the loan company needs to reclaim the property to recover the remaining unpaid loan amount, the mortgage company have first claim on any equity released and only then will the loan company be able to take the funds they are owed.
The amount available on a secured loan tends to be larger than that offered through an unsecured channel; this is because the lender has a guarantee that one way or another they will be able to reclaim their funds. Loan amounts may be anything up to 125% of the value of the secured property but tend to be between £3,000 and £100,000, although a higher amount may be possible.
The interest rate applied to a secured loan is dependent on the amount borrowed, the value of the property against which the loan is secured and the personal circumstances and credit history of the borrower. Although interest rates are likely to be higher for those with a poor credit history, in general, secured loan companies (especially those who specialise in bad credit loans) are more willing to lend to individuals who fall into this category because of the security provided. This also applies to others who may find it difficult to obtain unsecured credit including the self employed and those who work on a contract basis.
Before committing to a secured loan it is important to compare the interest rate with that offered by other secured loan providers. This is because, due to the larger amount borrowed over an extended time period the interest rate applied tends to have a bigger impact on repayments. However, it is important to bear in mind that the typical APR advertised may not be the rate applied to your loan but it is likely to give you some indication of the spread of the interest rates and therefore the amount for which you may be eligible.
Most secured loan companies offer the option of payment protection to be taken with the loan. This insurance is designed to cover the loan repayments for a certain period of time if you are unable to work due to accident, sickness or unemployment. Although this comes at an added expense, it can be worthwhile especially if you do not have any other means if paying the monthly amounts as your home is likely to be at risk if you don't meet the repayments.
The majority of secured loan companies do not place restrictions on what the borrowed funds can be used for (providing it is for legal purposes), so whether you want to consolidate your existing commitments or refurbish your home, a secured loan can be a good option. However, before committing to a secured loan make sure the monthly payments offered are manageable within your income budget and that you are happy with any administration fees charged as well as that you have backup in place to continue with the loan repayments if you are unable to work.
