If you need to borrow money and want a favourable interest rate and lengthy repayment period, a secured loan may be the answer. However, given that it will likely be secured against your home, it can be risky.
What is a secured loan?
When borrowing a significant sum of money (typically more than £10,000), most people will turn to a secured loan. The word ’secured’ usually refers to the fact that the borrower’s home is made available to the lender should repayments fall behind. As such, secured loans are usually only available to home-owners.
Traditionally used for significant investments such as property improvements, secured loans are becoming increasingly popular as a way to consolidate pre-existing debts into one single monthly payment.
Why would a secured loan be right for me?
If you need less than £10,000, an unsecured loan is usually the sensible option. However, if you need to borrow big and do so quickly, a secured loan can be a very tempting prospect for several reasons.
- They’re easier to obtain. Creditors want to be repaid and it therefore stands to reason that, if you’re willing to effectively hand them the keys to your property should you fail to meet their demands, they’re far more likely to say ‘yes’ when you ask for a loan.
- You can borrow more. The maximum a lender will give you via an unsecured loan is £35,000, but if you’re willing to bet your house on the repayments, you can expect up to £75,000 or more.
- You can pay back over a longer period. Lenders offering secured loans will usually accept much longer repayment periods than those attached to unsecured loans. While this increases the cost of the loan overall, it has the net effect of reducing monthly payments.
Why wouldn’t a secured loan be right for me?
Obtaining a secured loan is a big deal and requires careful consideration. Here’s the top three reasons a secured loan might not be for you:
- You don’t need to borrow any more than £10,000. If you need some cash to buy a second-hand car or refurnish the living room, a secured loan is generally considered a bad idea. It’ll lengthen the amount of time in which you have to repay, increase the overall cost and… well, is that car really worth potentially losing your house over?
- You want to avoid early repayment penalties. Most secured loans will feature some form of penalty for paying back the sum early. If you are able to budget far enough ahead and feel you’ll be able to do just that, an unsecured loan will be a better option as most lenders will be more lenient when it comes to early repayment.
- Your financial future is uncertain. If you’ve entered a turbulent time at work or have doubts elsewhere about your earning potential as time progresses, a secured loan (or, in fact, a loan of any kind) could be too risky a prospect. Remember – you’ll potentially lose your home if you are unable to repay.
Using a secured loan to pay off your debt
Secured loans can be used to pay off existing debt by consolidating several monthly repayments into one, but there are two things you need to consider before heading down to the bank:
- Get to grips with your existing debt. Your new secured loan should only be used to pay off the more expensive debts you have. A good idea is to list all the amounts you owe, writing next to each amount what interest rate is being charged. Draw a line on the list at the secured loan rate. Anything above the line (i.e. is more expensive) consolidate. Anything below the line is cheaper than the secured loan – so leave it (although if it is over a short term you may need to include it to keep your monthly outgoings affordable).
- Consider how long the loan period can be. To do this, you’ll need to work out the maximum you can realistically commit to repaying; underestimating may lead you to enter into a lengthy repayment term, whilst overestimating can force you to overstretch yourself and put your home at risk.
How to obtain a secured loan
Approach your existing mortgage provider, your bank or a reputable finance broker regulated by the FCA.
We don’t need to tell you how important that roof over your head is. Risking your house by offering it as security against a loan should therefore never be taken lightly. However, if your financial future looks positive and you have a firm handle on what you can afford to repay, it could be the perfect way to either consolidate existing debts or raise funds for those home improvements you’ve dreamed of.