Secured borrowing is a great way to raise money when you’re struggling to do it yourself, but how do secured loans work?
What is a Secured Loan?
A secured loan is money you borrow which is secured against an asset you own – normally your home. You can access cheaper rates plus pay back the loan over a longer period of time. However, if you fail to keep up with repayments, you risk losing your home to the lender.
How do Secured Loans work?
If you’re a homeowner with available equity in your home, you have the option to take out a secured loan.
A secured loan can be considered as a first or second charge.
First charge means you’ve borrowed a loan for home improvements when you don’t have an existing mortgage. Second charge involves making an agreement with your current lender or going to a different lender.
The loan is secured against the equity you have in your home, which is the remaining amount after you deduct your mortgage from the current value of your home . If you’re not a homeowner, this option won’t be available to you. Similar to your main mortgage, the loan is repayable over a long period of time – typically 3 to 30 years.
You can use your secured loan for almost anything. It can be used to put down a deposit on a new home, purchase a new car, home improvements or to consolidate your debt. Once you’ve taken out your secured loan, you then make monthly repayments based on the interest charged.
The terms of your loan will be determined by certain factors, including:
- Your income
- Credit report
- Existing debt
- Current equity in your home
The interest charged by your lender will be influenced by how much you borrow and the length of time you borrow the money for. The equity available in your home will also impact the interest rate your lender charges.
Where can I get a secured loan?
When taking out a secured loan, it would be worthwhile speaking to your mortgage lender. They may offer you a special deal if you’ve got a good repayment history.
You can ask your lender for an advance, where you borrow an additional amount of money against your home. You can use this method if you’re looking to do some home improvements or to put down a deposit on a new home.
You could also compare different deals and lenders on comparison websites. Keep in mind, you might not find the best deal by using a comparison site, as you’ll only find a selection of offers. Always look at the terms and conditions of every deal you come across.
The best way to get a secured loan is by using a broker. They can check your eligibility for free, without the risk of hurting your credit score. They will also search the entire market to find you the best and most affordable deal. They will take you through the process step by step, taking the time to understand your current situation so they can match you to the right lender.
They’ll give you their best advice and recommendation as to what the best option is for you, all free of charge. If you choose to go forward with the recommendation, they’ll take care of your application right through to completion. If their recommendation isn’t for you, then there’s nothing to pay.
Any related fees will be quoted to you well in advance before you decide to go forward with your application.
Are secured loans easier to get?
Secured loans are far easier to obtain. Since the loan uses your home as collateral, this poses less risk to the lender. Plus, secured loans are perfect for those with bad credit. If your credit score isn’t glamorous, you still have the possibility of being approved.
However, if your credit score has gone off the deep end, you’re more likely to be rejected. The first thing a lender looks into when deciding to lend to you is your credit report, as they need to know if you’re dependable to make repayments. There are steps you can take to build your credit score by making a few simple changes.
Do your homework before applying for a secured loan.
In more simple terms, work out if you can afford it. When applying for the loan, you need to offer your home as security. If you fall behind on your repayments, the lender has a legal right to repossess your home to retrieve the money.
It’s important you think carefully before going forward with a secured loan. If you’ve got a good credit history, you might want to consider applying for an unsecured loan, which means you don’t have to use your home as security. Though you may face higher interest rates with an unsecured loan, it won’t be secured to anything you own.