If you’ve found yourself in a bit of a financial pickle or have your sights set on a big buy, you may be meditating on the subject of secured loans. A secured loan is one of the most popular types of personal loan.
Before you get over-giddy and sign up for the first one you can find, take a minute to unshroud the secrets of the secured loan with our guide below.
What is a Secured Loan?
A secured loan is covered – or secured – by an asset owned by the borrower. This asset then becomes a secured debt for the of the loan.
- Usually, have lower interest rates than unsecured loans
- Can have a fixed or variable rate of interest
- Can have a fixed or variable pay-back time
A secured loan allows you to borrow a fixed sum. They are often used for the likes of home extensions, or perhaps the need for a new car at short notice. You then pay this back gradually, which can mean lower monthly payments than many other loans. How much you can borrow will depend on your individual circumstances, but many providers offer loans for up to £35,000, over periods of five to 20 years.
Secured loans tend to offer lower interest rates because they’re secured against an asset, such as your property. Of course, this means you risk losing your home if you don’t keep up with your repayments, which isn’t an attractive prospect for anyone and is something that deserves a serious ponder.
You definitely shouldn’t commit to a secure loan if there’s any question over whether you will be able to repay it. If you’re sure you can, when you sign for a secured loan you will pay your provider back over an agreed time period, along with the added interest charged for the loan.
Check Interest Rates
Many secured loans come with variable interest rates, which means the amount you pay could change. This has the potential to put a real spanner into your carefully constructed budget. If you choose a loan with variable rates, you’ll need to be confident you could handle a rise in repayments.
You should also be aware of fees that could add a considerable amount to the overall fee you pay back. Many charge an arrangement fee for the setting up of the loan. They can also ask for early redemption fees if you settle the loan early or make overpayments.
Compare Secured Loans
People often choose a secured loan when a credit card or unsecured loan isn’t an option. This might be because they don’t have a great credit rating, or it’s not possible to use a credit card for what they are buying.
If you’ve decided a secured loan is the right choice for you, you’ll want to search for the very best terms. When you’re shopping for a loan, remember that annual percentage rates (APRs) are representative, so while you might bag the best interest rate advertised it’s not guaranteed. If you’ve got a great record for paying your mortgage on time, your lender may be able to offer you a good deal, but be sure to compare secured loans before settling on the best option for you.
Secured v Unsecured Loan
Secured or unsecured loan…that is the question.
Unsecured loans aren’t always available for things like consolidating debts, and secured loans can sometimes be a smart tool in these type of circumstances. If you’ve previously been refused an unsecured loan and are searching for a secured loan as a result, it’s always worth checking your credit report for factors that could be holding you back before you apply for a secured loan. There may be some errors on there you could have removed or little things that can be easily fixed.
It’s been said before but just as a quick reminder, you definitely shouldn’t take out a secured loan if you think you may struggle to meet repayments. Borrowing over a longer period also means you’ll pay more back in total because of interest mounting over time.