The Good and Bad of Secured Loans
Secured loans are one of the most popular forms of finance apart from mortgages. They can be a very useful way of raising finance for home improvements or debt consolidation and so on, but they have both good and bad points that need to be taken into account before deciding to apply for one.Firstly, we'll deal with the positive aspects:
Higher Loan Amounts
Compared to unsecured loans, larger amounts of money can be borrowed when you use your home as security (providing you have sufficient equity in your home of course). This means a single secured loan can be used to pay off all your other unsecured loans, in the process known as debt consolidation, leaving you with a simpler budget and (hopefully) lower monthly repayments.
Longer Repayment Terms
A secured loan can often be repaid over a period of up to 25 years. While a longer repayment period will usually mean more interest is paid on the loan overall, it will also mean the monthly payments themselves will be lower which could be vital if your budget is currently stretched.
Higher Approval Rates
By using your home as security, the risk to the lender is lessened. This means that they can be less choosy about the applicants who they accept. This means that a secured loan is easier to get than an unsecured one, especially if you have a less than perfect credit rating.
Lower Intersest Rates
For the same 'lessening of risk' reasons, lenders don't have to charge as high an interest rate to cover their potential losses of a loan going unrepaid. This means some secured loans can be available at very good rates compared to other forms of credit.And now we'll look at the bad points:
You Need to be a Homeowner
This is a fairly obvious point, but only people who own their home can consider taking out a secured loan. This means that people who rent their homes are limited to unsecured loans.
Your Home is at Risk
When you put up your home as security on a loan, you need to be absolutely sure that you can keep up with the repayments. Should you fall behind, the lender has the legal right to repossess your house and sell it to clear the debt. This isn't likely to happen immediately you get into trouble, as most lenders will try and come to an arrangement to restructure your loan so that you get back on track, but it's a very serious possibility that needs to be borne in mind.
Smaller Amounts Not Available
This is the other side of the coin to the point above about higher loan amounts being available: most lenders of secured loans will only offer £5k or higher loan amounts, as smaller loans won't earn them enough in interest to cover the legal and administrative costs of issuing the loan. This means that secured loans aren't appropriate for smaller amounts, possibly resulting in you borrowing more than you really intended to.
All in all, a secured loan can be a very useful way of raising funds, but needs to be entered into with full consideration of the dangers as well as the benefits.