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Secured loans are a way of borrowing a lump sum of money against an asset that you own. In most cases this asset will be your home, but it can be something else of value too. You can use the equity from this asset to fund any number of things, including home improvements, a new car, a dream holiday, or even to pay off existing debts that are getting out of hand.
A secured loan gives you access to low interest rates that just aren’t possible with unsecured alternatives, and you can also pay back over a longer period of time so you don’t feel the pinch each month. The big thing to consider is that, should you default on your payments your home will be at risk, so you need to think long and hard before entering into any financial agreement.
If you’re a homeowner, a secured loan gives you the opportunity to borrow the equity in your home. The equity is the difference between how much a house is currently worth versus the amount outstanding on the mortgage.
Current house value - outstanding mortgage = equitable amount
E.g; £200,000 - £150,000 = £50,000 equity
There are two variants of secured loans, first charge and second charge. A first charge secured loan is where you borrow money on the equity of the house for home improvements but don’t actually owe anything on the mortgage. A second charge secured loan is where you borrow from the equity and you do have a mortgage. You can make a deal with your existing mortgage company or fund it through a different lender.
The main advantage of a secured loan is that you can make the repayments over the same amount of time as you would a mortgage, so anywhere between three and thirty years. This helps to keep the monthly repayments exceptionally low. The loan can be used for a variety of purposes such as a new car, home improvements, even as a downpayment on a second property.
The amount you pay back each month and in total will vary dependent upon a number of factors such as;
These factors will determine the financial package that is offered to you. The results of them could affect how long you pay over and the amount of interest that will be added.
As with any financial undertaking, it’s best to speak to an expert before you sign on the dotted line. A mortgage advisor, or broker as they are sometimes known, will have knowledge of the best products on the market and can actually check what products you would pass for without damaging your credit score. They can also explain to you step by step the various different stages of the process. Most brokers give this advice freely, and if you decide not to go ahead then there’s nothing to pay.
You could also make enquiries with your existing mortgage company. Depending on your payment history with them they may be able to offer you an excellent rate to keep you as a customer.
Another method which has become quite common recently is through comparison websites. You can search different deals and lenders just as easily as though you were searching for car insurance. If you are relying on this method it’s important to realise that you might not always get the best deal and you must read and re-read all the terms and conditions attached to the deals on offer.
Regardless of which method you decide to go with, all fees and charges should be quoted clearly and concisely well in advance of you signing up for the package.
In general, secured loans are much easier to obtain than unsecured loans, and the reason behind this is very simple. By securing a loan to your property, there is not as much risk involved to the lender. In a way they have an inbuilt insurance policy by having a property attached to the loan - if anything goes wrong, they have the house to fall back on.
A lot depends upon your credit report. If you have a bad credit history you may still pass for a secured loan, but the package that is offered to you may be much less attractive than if your report were in better shape. There are a number of things that you can do to improve your credit score, and it’s a good idea to practice forward-thinking where a secured loan is concerned. Start planning to make a concerted effort to improve your credit report at least 12 months before you apply, that way the deals that will be offered will be much improved.
Firstly, and most importantly, you must do your homework! There are so many deals out there that you owe it to yourself to do as much research as possible. Low rate APR deals and other offers are common, so the more you look the better your chances of scoring a great deal.
Use an income and expenditure calculator. Make a list of all your forms of income and all the various drains on that income. What you have leftover after everything is accounted for is known as disposable income. When you apply for a secured loan, your home is offered up as security, so you need to make sure you can afford the repayments. If you fall into difficulties, your lender has the right to take your home to repay your debts, so check those figures again and again to make sure you can afford the loan comfortably.
Think. A secured loan is a great way to access a lump sum of cash to do whatever you want with, but it also has serious repercussions. If you are paying for it for as long as you are paying your mortgage then it makes sense to get the best possible deal you can. Try to whip your finances into the best shape they can be and don’t just take the first deal that you are offered. For advice on how to improve your credit rating, click here.