Secured loans explained

Reader's Digest Editors

There seems to be a lot of confusion out there related to the nature of secured homeowner loans and how they work. Many people also struggle to make rational decisions about whether or not that form of lending is suitable for them because they don’t grasp the ins and outs of the concept. With that in mind, this article will help to explain the nature of secured loans and provide you with some pros and cons.

What is a secured homeowner loan?

In a nutshell, secured loans enable property owners to lend a lump sum of cash against the value of their house over long repayment terms, usually between 3 – 30 years. Loans can be secured against your house or a buy to let property. The amount you can borrow will vary depending on the equity available and the affordability of the loan. These types of loans are often referred to as second charge mortgages and homeowner loans.

Like your mortgage, the loan is secured which means you use your home as collateral, and the lender could repossess it if you fail to make repayments or you break the loan contract. You don’t usually have to worry about extortionate interest rates because the lender feels secure knowing the arrangement is of low risk.

From the lender’s perspective; they will get their money back either way so they do not need to add high interest charges like they often do when offering with some unsecured lenders in the market place.

How much can I borrow?

Dave Beard, Lending Expert at second charge mortgage specialist Feasible.co.uk explains: “You can borrow from £3,000 to upwards of millions of pounds. Interest rates as of Summer 2018 start from around 4% APRC (Annual Percentage Rate of Charge) for good credit customers and as high as around 15% for those who have past credit issues. There are a range of lenders who offer loans up to 95% loan to value and some will borrow 100% where additional security can be provided. However it is worth noting that the rates are far higher on these products and the lower the LTV (Loan To Value) the cheaper the interest charges will be. The most you can borrow on a buy to let property is currently 75% loan to value.”

What can secured loans be used for?

Loan funds can be used for any legal purpose such as:

  • Making home improvements
  • Consolidating debts
  • Purchasing expensive items such as cars, vehicles and paying for holidays
  • Weddings
  • Paying outstanding tax bills
  • Business use
  • Investments such as buy to let property

What are the pros?

There are lots of benefits to opting for secured loans. As mentioned above; you will usually manage to get better interest rates than you could find with unsecured loans, especially if you have credit issues. You can also get the money pretty fast because you already have the house you will use as collateral. With secured homeowner loans; you can often gain access to tens of thousands of pounds fairly quickly if you have the equity in your home. That isn’t always possible when looking for unsecured alternatives. A benefit is that homeowners are able to borrower larger sums of money and can repay them over a longer period of time which means that monthly repayments are lower and more affordable.

What are the cons?

Just as there are many pros to accepting secured loans, there are also  cons too. For instance, if you repeatedly break your contract by falling behind on payments, the lender may start court proceedings and attempt to repossess the house. Also, it is often challenging to find a lender willing to offer fixed rates. They are usually variable, and that means some people might struggle to budget and plan their finances for the future.

Another thing to consider is that most second charge lenders do not accept customers directly which means you will need to use a broker to package and apply to the lender upon your behalf. With this comes additional costs in the form of broker fees which are around 10% of the loan amount. These fees can be added to the total loan amount if you wish.

Make sure you never rush into any form of lending, secured homeowner loans have many pros and cons so you need to weight them all against your situation to work out whether or not they are the right option on the table. If you are unsure then speak with a financial advisor and get professional independent advice.

Sources:

https://www.lendingexpert.co.uk/unsecured-vs-secured-loan/

https://feasible.co.uk/secured-loans/