Are Secured Loans Worth the Risk?
Using your properties – such as your home or our car as collateral may be an easy way to get a loan if you need a huge amount, or if you have bad credit. However, is it worth the risk? Let’s take a look.
Can you apply for a secured loan?
To be eligible for a secured loan, you will need to provide a form of security to the lending company in the form of collateral. This could be a property that you legally own, but there are other instances where potential lenders could consider other items as collateral. Moreover, lenders will also look at your ability to pay the loan back (similar to an unsecured loan).
The significance of collateral
Collateral is a form of security for the lender in the event that the loan is not repaid as agreed. By putting up a property as collateral against a loan, the lender will have claim over a part of the value of the collateral until the loan is paid in full. This way, if you end up defaulting the loan, they will have the right to put your property up in sale to regain the funds they lent to you.
Moreover, if you are able to provide collateral against a loan, you are seen a less of a risk to lenders and can also be a way to help you get loans with lower rates, more flexible terms, and have the ability to borrow bigger amounts.
Are you in the right place to get a secured loan?
If you had the choice between a secured and an unsecured loan – everything else being equal, you should always go for the unsecured loan.
The main difference is the collateral – a secured loan hands over a piece of your property to the lender while the loan is ongoing, and may end up being repossessed if you are unable to meet the terms of payment. When it comes to unsecured loans, you are not placing your properties at a direct risk. Furthermore, if you secure your home as collateral and you choose to have it re-mortgaged, your options could be limited as it is signed against an ongoing loan.
However, there may still be cases when secured loans are more favorable:
You need a large amount of money
When it comes to unsecured loans, the highest amount you can get is £25,000, and yet this amount is only awarded to those who meet the strictest of requirements and have an excellent credit history.
For secured loans however, the amount may be much higher than that as lenders can still get the money back (even if you default) through the property that you placed as collateral.
The amount that you’ll get with a secured loan depends on the following:
The value of the property
The equity you have in the property
The amount that you are reasonably able to repay
If the above are all applicable for your property, then you may get as much as £500,000 for a single loan.
You will need more time to pay the loan off
Unsecured loans are usually designed to be paid off between one to five years. There may be lenders who can allow 10 year terms but these are rather rare and are for very specific situations only.
If you wish to borrow money and spread the cost of repayment over a longer period of time, then a secured loan is the better choice.
If the lender finds that your collateral is suitable for long-term borrowing, then they are usually more amenable to offering loans that have a longer life span.
However, this may not be the most ideal option still, for the longer the loan is active, the more interest you will end up paying if you sum it in full.
You don’t have other better alternatives
If you are suffering from a poor credit history, then a secured loan may end up being more affordable compared to unsecured loans.
The difference again lies on the collateral. Even if you have a bad credit standing, the lenders will still have the guarantee of your property in the event that you are unable to pay off the loan.
With that said, it is still best that you consider all risks of getting a secured loan – including the possible loss of your property if the loan agreements are not met.
The risks of getting a secured loan
First, the inability to pay the loan timely could mean the loss of your property. At the worst, you can end up being homeless as the lenders have the right to repossess and sell your property so they can earn back the money that you borrowed from them.
For this to happen though, things would have to be really wrong and extreme – but it is still a risk that you need to consider before getting a secured loan.
While it may be costly to the lenders to repossess your property and eventually reclaim the balance you have on your loan, you still signed a contract with them and this gives you little to no right stop them from doing so.
As mentioned earlier, placing your home as collateral could be complicated when the time comes that you want to move to another house, or to sell it altogether.
How to find the best secured loan for you
If you have considered the risks and decided that getting a secured loan is the most feasible option, then it is imperative that you shop around for the best deals possible.
It is not just about getting the cheapest loans, but you should also consider the flexibility of the terms, the restrictions, as well as the amount that you can borrow.