Lodestone Guide to Secured Loans

secured loan house

So what is a Secured Loan? Also known as second charge mortgages or homeowner loans, secured loans enable you to borrow money using your home as security.

This does however mean that if you don’t keep up with repayments, the lender can sell your property in order to get their money back.

How do they work?

Just like with any other loan, you will be expected to make set monthly payments in order to pay back what you owe, plus interest. The interest rate could be fixed or variable depending on the type of loan you have chosen, and as long as you make the monthly payments on time and in full, you won’t be at risk of losing your home.

What’s the difference between a secured loan and an unsecured loan?

As mentioned above a secured loan uses your property as security, however, an unsecured loan is not linked to your property or any other asset in any way. As such, because of this lack of security, there is nothing for a lender to claim against if you fail to keep up with your repayments, and because of this they consider them to be higher risk. Because of this you generally need to have a good credit score in order to get approved. You can check out your credit file here www.checkmyfile.com

What are the advantages of a secured loan?

The biggest advantage is that you are able to borrow larger sums of money. With unsecured loans you can usually borrow up to £25,000, but with secured loans £100,000 or more. This is particularly useful if you have a big project in mind, such as extensive home improvements.

Another big advantage is the period over which you choose to repay the loan. This is useful if you are borrowing larger sums of money and typically people choose a term that runs alongside their main mortgage and makes them more affordable.

Finally, it is often easier to get approved for a secured loan if you have poor or even no credit history, mainly because the lender is using your property as security, and thus lowering the risk to the lender.

…and the disadvantages?

Because your property is used as security, there is the risk that if you default on your payments that the lender can repossess your home to recover the debt. Its this security that gives the lender the benefit rather than the borrower.

As mentioned above having a longer period to repay the money does make the payments cheaper, however, as a result this also means that you are more likely to pay back much more interest overall.

What if I’m able to repay the loan early?

There are many reasons in life for a change in individual circumstances. As a result, you may find that you are able to pay back the loan early. Don’t forget that because the loan is secured against your property, if you sell then you must repay the loan also.

It is possible to repay a secured loan early, but in most cases, there will be a penalty to pay, and this would likely be around 1 – 3 months interest payments. We suggest you speak to your lender who will quickly be able to tell you what the fee is, and how much you still owe.

Is it easier to get a secured loan?

Because you’re usually putting your property up as security to guarantee your payments, the answer is yes. The lender will see you as less of a risk, and your credit history will be less important. So, if you’ve been refused other forms of credit, and you own a property then a secured loan could be for you.

Things to consider before applying.

Because you are using your property as security, secured loans should not be taken out without serious, prior consideration. The following should be taken into consideration:

Your ability to repay

You should carefully consider what you can afford to repay each month, and whether you really need what it is that you are considering buying. Have a good look at your finances, taking into consideration future expenses. You need to be confident that you can meet every monthly payment without difficulty for the entire term of the loan, and even if your financial situation changes.

Your loan-to-value ratio

When applying for a secured loan, the lender will also look at the value of your property, and any mortgage outstanding on it, so they can calculate your loan to value ratio. They need to know how much equity you have in your property now and after the loan has been taken out, and what security is available to them should you default on your payments. Generally speaking, the more equity you have, the more you will be able to borrow.

Interest rates

Secured loans generally have a variable rate, not fixed, so you should factor in the possibility of any rate increases. You should also compare loans from several providers and use the APRC to do this. The APRC is the interest rate plus any fees that the lender charges, so it gives you a better indication of the true cost of the loan.

Another thing that you should consider is the rate that you will pay. Do not be fooled by the rate that you see advertised. This rate is generally the best rate available, but the rate you pay will be determined by how much you want to borrow, for how long and what your credit looks like, amongst other things.

How do you find a secured loan?

You should always shop around to find the best deal but ensure that when doing this that the providers don’t carry out credit searches until you apply as this can affect your score. If possible, speak with a specialist broker who should have access to the whole market (like Lodestone) . This will save you a lot of time and energy.

What if I default on my payments?

If you have done all the above you should be well placed and not have to worry about being unable to make your monthly repayments, However, things do happen in life and circumstances can change. Firstly, you should speak with your lender as soon as possible. They would much rather help you find a way to make your payments than go to the trouble of repossessing your property. They may be able to adjust the terms of your loan, reducing payments or pausing payments for a short period of time.

Ultimately, you must remember that it is your responsibility to make your payments and if you cannot do so, the lender does have the right to take further action, and this could affect your credit profile.

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