Second Charge Loans
The most common type of security used in secured borrowing is the applicant’s home, though other assets of value may be considered by specialist lenders. Secured loans are relatively simple agreements, whereby the lender takes ownership of the security (or collateral) if the borrower fails to repay the loan.
When would you need a Secured Loan
- Home Improvements from light refurbishments to extensions
- Raise deposit to purchase a second property
- Debt Consolidation
- Capital injection into business
- Repay loans on a help to buy scheme or other government funded schemes
- Bad credit where you might not get a personal loan but could borrow against your property
- Where income source is non-confirming or from multiple sources
- Funds can be raised for any reasonable reason
Secured Loans Pros & Cons
Advantages of a Secured Loan
- Larger loans – it allows you to borrow more than personal loans which are usually up to £25,000
- Long term – similar to a mortgage, it will allow you to borrow funds for a longer term (depending on your expected retirement age/retired income) which in turn helps to keep a more manageable monthly payment, making it more affordable by spreading the cost
- Borrow more than standard mortgages – Lenders of secured loans will typically allow you to borrow more using higher income multiples or higher loan to values or both
- Lower rates compared to certain other types of finance such as credit cards and certain personal loans
- Allows you to keep your existing low rate mortgage product
- Cheaper alternative to remortgaging as you might be tied into your mortgage product and have high exit charges
Disadvantages of Secured Loans
- Interest rates can be higher than a mortgage
- Upfront costs such as lenders arrangement fees and valuation charges
- As monthly payments are spread over a longer period compared to a short-term unsecured loan, you may end up paying more in the long run
- Using the equity in your asset
A typical example of a secured loan is a mortgage, wherea loan is issued against the agreed market value of the property. As the lender effectively has an insurance policy in the form of the security (in this case the borrower’s home), secured loans can be issued at highly competitive rates.
When the loan is repaid in full as agreed in the contract, the lien is lifted, and the borrower retains full ownership of their property. If the borrower defaults on their loan or breaches their contractual obligations, the lender may begin the process of seeking repossession of their home.
Therefore, it is of the utmost importance for secured loan applicants to understand their obligations and carefully consider their budgets, before entering into a secured loan agreement of any kind. Most secured loans are long-term agreements and must be approached with due care and attention to limit the risk of forfeiture of assets.
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As everyone’s individual circumstances vary, it is very important that the decision to borrow any finance is made after careful consideration. As the loan is secured against your property it may be at risk of getting repossessed if regular payments are not maintained. It might be prudent to take out an insurance policy to protect the secured loan in the event of illness or redundancy.