If you are looking for a loan to help you through a difficult financial situation or to assist with home improvement, you may consider secured loans instead of borrowing from friends or family.
Let’s take a closer look at what exactly a secured loan is, the advantages it can bring you and the different types of secured loans that are on offer. We will also look at the consequences of defaulting on your borrowing. This will arm you with information on secured loans so that you know for the future.
What is a Secured Loan?
A secured loan involves borrowing a certain amount of money from a lender and using your house or an asset as security. This is also referred to as collateral and it means that if you default on a payment, your house or that asset will be used to cover the amount and as loan security. There are certain terms for repayment that will be communicated to you with secured loans. This includes the monthly repayment amount and interest and how long you have to pay back the loan.
A lender will normally look at the equity on your property. This means the mortgage that you still owe for your houses, as well as how much that property is worth. The common rule is that you are more likely to be able to borrow more money if you have more equity.
Secured loans are different from personal loans and it is important to know the difference. A personal loan is often referred to as an unsecured loan. This means that it does not involve loans secured on your property or another asset that you own. This makes it a higher risk type of loan for lenders since they cannot secure an asset to cover the payment if you default on the loan. This can often make it more difficult for people to get a personal loan, as they lender has to know there is a high probability that you will pay it back. Normally, this includes having a very good credit score.
It is important to realise that homeowner loans normally have an interest rate attached to them. This means that you will be paying back your loan each month with interested added onto the total. The interest rate you can expect will vary depending on a variety of different factors. This includes the amount of money you have borrowed, as well as your credit history, credit cards and personal circumstances. Always factor in the interest rate when you are budgeting to pay back your secured loan. This way, it will not be a surprise when the payment is taken. A consideration to make is that if you get a secured loan over a longer period of time, you may be charged more in interest in comparison to a shorter time, as it is charged monthly.
What are the Benefits of a Secured Loan?
There are many advantages to secured loans, depending on your circumstances. Personal loans may be a preferred option for people that are looking to borrow small amounts of money.
But it can be harder to do this with larger sums of cash. Secured loans often allow people to borrow significant amounts due to the security of the transaction.
The lender has the security of your home and knows that if you do not pay the money back, your property can be repossessed to pay back the debt. For example, a secured loan could be for £30,000 or even more than this. You may also be able to enjoy a secured loan over a longer period of time. For example, you can have a secured loan for five to 25 years.
The Three Types of Secured Loans
There are three common types of loans that you can choose from. First, there is a short-term fixed rate of secured loans. This is an option that means you enjoy paying back a fixed amount monthly. The interest is fixed and does not change. After this short term, which could be between one and five years, a standard variable rate will be reduced. This can mean your payments may increase or decrease.
Next is fixed for term secured loans. Just as the name suggests, the secure loan amount that you pay is fixed by the lenders for the number of years that you have agreed. None of your payment amounts should change. This can make a good choice if you are on a budget and want to know exactly what you are paying monthly.
Last, we have variable rate secured loans. This means that you will have your loan amount to pay back but the amount of interest you pay will fluctuate. In other words, you may more one month and less the next . But the point is that your monthly payments will change depending on the market.
No matter what one you choose, it is essential that you are confident in your ability to pay back the secured loan on time to the lenders. This includes looking at your finances and expenses each month to see whether you can afford to have a secured loan. Perhaps there are lifestyle changes you can make to ensure this happens. The last thing you want is to risk defaulting on your payments and losing your family home.
The Consequences of Defaulting on a Secured Loan
Unfortunately, there can be bad consequences if you default on your secured loan repayments. As it is a secured loan that attaches to your property or asset, this means that the lender has the right to repossess your property or asset. This can involve selling your home to reclaim the repayments that you did not pay back. If you know that you are not going to be able to complete a monthly repayment, it is important to let your lender know. There is perhaps some agreement that could happen. You should always think carefully before securing a loan and securing other debts if you have some already.
Anyone that chooses a secured loan should make it a priority to make all of the payments on time. They should also be in full. A lot of people choose to set up direct debits to ensure that this happens. In addition, having a budget each month can make sure that you have cash left to pay back loans. This can avoid any consequences happening, such as losing your family home, as well as damaging your credit score. This could mean that it may be harder in the future to access a loan when you need one.