To put it simply, this loan is only available to those who own a property (such as a house or a car) where the lender can simply sell your property if you can’t pay back the loan. In short, the lender is getting a “security” from you. Normally, personal loans from a bank or building society are unsecured.
Why Would You Want a Secured Loan?
Until recently, borrowing against your asset has been a taboo subject and has been seen as evil, yet in specific circumstances where all other means are exhausted, a secured loan can be an acceptable solution. These are just some of the reasons why a borrower would want a secured loan.
Easy to Obtain
While unsecured loans are almost always the cheapest option for borrowers with impressive credit scores, secured loans may be the only available option for those with bad credit because the presence of security gives lenders some peace of mind.
It’s Possible to Borrow a Big Amount
Typically, the maximum amount you can borrow with a secured loan is higher, especially if there’s substantial amount of equity in the property.
The Repayment Period is Stretched Out
While unsecured loans typically last from 1 to 7 years only, secured loans usually last from 5 to 20 years. This is because lenders prefer longer loans to offset hefty set-up costs. But while longer repayment periods reduce the monthly payments, the total amount of the interest substantially increases.
What to Consider Before Getting a Secured Loan?
Credit Card Balance Transfers
While credit cards may have a bad rap, they may often be a cheaper and more reasonable solution to manage your debts, especially if switching to a balance transfer credit card.
Check with Credit Rating Agencies
If you’ve been denied an unsecured lending without poor credit rating, you need to check with the three credit reference agencies and fix any mistakes that may be present.
Use Your Savings
While you’d commonly hear the importance of saving a portion of your income every month, it makes sense to delay saving if it means paying off your debts first. This is because the interest earned from your savings is far less than the interest charged when you borrow money. Once you’re finished paying off everything, that’s the time you should start building your emergency fund.
Make a Budget
If you find yourself constantly in the need to borrow money, perhaps you should take a look at your monthly outgoings. Most often than not, reducing your expenses can help stretch your income without the need to borrow money.
Remortgaging is just another type of secured loan, except that they tend to have cheaper rates. Sometimes, remortgaging to a cheaper deal is a valid alternative, but be sure to think about how long you’d want the loan to last.
Consider Debt Counselling
If after everything you still find it hard to make ends meet, perhaps it’s time to seek professional advice. It’s best to avoid commercial debt management companies as there are a lots of free or charity-based programs you can explore that were built to put your welfare first.
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