We all need a helping hand from time to time. When things get a little tight with our finances, we might turn our attention to a loan application.
The thing is, the world of finance can be a little daunting and sometimes, even confusing.
Loans are no exception. There are lots of different types of loans out there, and one of the most common types of loans to hear about is known as a secured loan. So, what exactly is it?
In short, a secured loan is a loan that is secured – or guaranteed – against something else. Commonly, this will be your home, but it doesn’t necessarily have to be.
Of course, there’s a lot more to know than this, so we’ve written this handy guide which aims to clear up any confusion or misconceptions you may have about secured loans.
Ready to learn more? Read on!
So, What Is A Secured Loan?
A secured loan is a specific type of loan that is sometimes referred to as a homeowner loan. This is because in order to qualify for this type of loan, you may need to use your homes as collateral.
In other words, the loan is secured against your home. This allows the lender the right to sell your home in the event that you do not keep up with the repayment schedule.
This type of loan is often easier to obtain when compared with an unsecured loan, as lenders have something to use, in case the worst should happen, and it gives them a little less risk when lending you money.
How Do Secured Loans Work?
Like many types of loan, the lender will assess your loan application and make a judgement based on their requirements.
Usually this will be based on your financial situation, your credit history and your basic demographics.
If you are approved, the lender will set out a repayment plan. Normally this will be a monthly payment which includes the set amount plus the interest rate.
The interest rate is calculated using a percentage of the total loan amount, and this could be a fixed rate for the duration of the loan, or it could be variable.
Assuming you continue your repayments each month until the loan is repaid, you won’t lose your home.
What If I Default On A Secured Loan?
Defaulting on any type of loan can become a significant problem, but when it comes to defaulting on a secured loan, the repercussions could be dire.
If you default on a secured loan, the lender has the right to repossess your home and then sell it to reclaim what they are owed. On top of this of course, your credit rating will take a huge hit.
It’s best if you find yourself in financial trouble and you think you are going to miss a payment that you contact the lender immediately.
You may be able to arrange a different payment plan, or even apply for breathing space.
How Is A Secured Loan Different From An Unsecured Loan?
As a secured loan is secured against your property (or some other high value asset), an unsecured loan is the opposite – you do not guarantee the loan against anything you own.
As there is no collateral for the lender, these types of loans are often seen as far more risky for them to provide. Therefore, these loans are often very difficult to obtain, or they come with a hefty interest rate.
As with secured loans, you will apply for the loan using your personal and your financial information and await for the decision from the lender.
There are many types of lenders that offer secured and unsecured loans and many will have completely different interest rates.
Generally, if your credit score is higher, the interest rate tends to be far more competitive. However, this isn’t always the case.
It’s a good idea to shop around if you are in an advantageous credit position – and if you are, you may find other credit options are better for you.
Advantages Of A Secured Loan
Although there are of course risks involved when applying for a secured loan, there are some advantages. Let’s take a look at these in more detail.
Often, you will find that if you can secure a loan against your property, the amount of money that you can apply for is larger than if you were to apply for an unsecured loan.
This is often very advantageous if you’re looking to make home improvements.
You will likely find that the loan duration for a secured loan tends to be longer than with other types of loan.
Easier To Obtain
Generally speaking, as the risk to the lender is lower with a secured loan, it’s usually easier to be accepted – rather than with an unsecured loan.
Disadvantages Of A Secured Loan
And indeed, there are disadvantages to a secured loan. Here are some in more detail.
Perhaps the most obvious disadvantage of obtaining a secured loan is the element of risk that comes along with it. If you fail to meet the repayments, you could find yourself homeless.
Time = More Interest
It’s possible that with a longer duration of loan, you will pay more money in interest fees overall. It’s a good idea to check this though before you accept the loan agreement.
If you wish to pay off the loan amount early, you may find you are hit with a very hefty early repayment fee – but this will vary from lender to lender.
The Bottom Line
Secured loans are loans that are usually secured against your home, and these loans can be useful for some people – but not for everyone.
Be sure that you think carefully before applying for a secured loan and consider all other options.