Secured loans enquiries are a pretty common topic from our customers, especially those who are weighing up remortgaging options and options to raise additional funds.
As a pretty common enquiry, we thought we’d put together an article to help you understand how, why and when a secured loan might be an option for you.
What are secured loans and how do they work?
A secured loan means a lender will offer you a loan using some form of tangible asset i.e. your property. The asset is legally bound as collateral to ensure there is a way to pay back your debt therefore making the loan secured.
In simple terms, it means that by having your asset secured against your loan (or used for collateral on your loan), if you default on your payments your lender has the option to repossess your home or asset and sell it to pay off your debt.
Lenders base everything around risk so by securing your loan against an asset minimises any potential risk to them not being repaid.
However, the loan can only be raised against the equity you’ve built up in your property, which is also why a secured loan can also be called a second charge.
By comparison, if you were to take out an unsecured loan your lender would not hold any asset as security. This carries a higher risk for the lender which they will seek to minimise with stricter lending criteria higher rates.
Why do I need a secured loan?
There are numerous incidents where a secured loan may be an option and they are usually used when large scale borrowing is needed. Typically it is used to raise additional funds for a specific requirement.
Common reasons for raising a secured loan could include:
- Home renovations
- Debt consolidation i.e. personal loans and credit cards
- Once in a lifetime holidays
However, you could be looking at a secured loan as one of your options if:
- You don’t want to remortgage as your already on a good rate
- You need a higher Loan To Value (LTV) loan i.e. 95%, which remortgaging won’t cover
- You need to raise finance fast
- You’ve recently become self-employed and getting mortgage approval is proving difficult
- You have bad credit
As with everything, each person’s circumstances are individual to them, so what’s right for one person may not be right for you. These are examples of common reasons we see from individuals seeking a secured loan. If you’re unsure then speaking with an advisor and explaining your circumstances can help you understand what your options are.
How much can I borrow – Do I qualify for a secured loan?
How much you can borrow will be based on the equity in your property and the LTV limits of each lender. It is worth noting that there are usually minimum equity requirements that will depend on the individual lender as each has its own set of criteria.
For example, you approached a lender with a minimum equity requirement of £200,000 and the current balance on your mortgage (first mortgage) stands at £100,000. In this instance, you would only be able to borrow up to £100,000 on a second charge or secured loan.
However, when we add LTV limits on top of the minimum equity requirements things start to change. For example, if a lender had a maximum 60% LTV and again your property is valued at £200,000 with the same balance of £100,000, it would mean you have access to £20,000. Worked out it looks like this, 60% of your LTV on £200,000 being £120,000, then minus the £100,000 that you still owe.
Advantages and disadvantages of secured loans
As we’ve said many times before, individual circumstances need to be taken into account when considering large financial commitments. What may be a good idea for some won’t work for others.
In that vein, we’ve weighed up some of the advantages and disadvantages of taking out a secured loan.
- Borrow larger amounts – as opposed to personal loans and unsecured loans, secured loans are available for much larger amounts. Lenders are much more confident that they will be repaid so are more willing to lend.
- Lower interest rates – again, because lenders take less of a financial risk than unsecured loans they are more willing to offer lower interest rates that will help keep your payments down.
- Flexible/longer payment terms – by spreading the cost over a longer term you can help reduce your monthly payments.
- A chance to rebuild your credit rating – Maintaining your repayments can benefit your credit score and help to rebuild it where you have had difficulty.
- Available to more people – If you have a less than perfect credit score, as your property acts as security lenders are much more flexible meaning secured can be easier to qualify for.
- You could lose your home – if you encounter financial difficulty and fail to make your payments your lender is entitled to seize your property.
- You need to be a homeowner with equity – to be eligible for a secured loan you need to be a homeowner and have enough equity to cover the amount you want to borrow.
- Borrowing more than you need could lead to financial difficulty – if you take on more than you need to you risk getting into financial difficulty which will again put your home at risk.
Speak to a mortgage advisor
You should consider all of your options when looking to raise capital and make large financial commitments. Secured loans are generally an alternative to remortgaging so consider that first.
Consulting an expert advisor who understands the market and who has access to whole of market lenders offering mortgages and secured loans can help with your decision making.
You advisor can talk you through options specific to you and your circumstances, recommending suitable products.
Contact us at Online Mortgage Guru on 0345 3669799 or email us via email@example.com and we will put you in touch with a suitable specialist to handle your enquiry.