In most cases, a lender who offers secured loans will require the borrower to provide a guarantee on the loan, which will substitute as repayment should the loan not be repaid. Traditionally, this guarantee is made in way of the borrower’s home, which can then be repossessed should they default on repayment.
Since this is the most common way to secure a loan, homeowners are the most qualified to apply and receive a secured loan. These are then also referred to as personal loans or secured homeowner loans.
First and Second Charge Loans
There are two types of secured loans – first charge loans and second charge loans. A secured homeowner loan is considered first charge if the property being used as security for the loan is owned outright by the borrower.
These types of loans tend to be much less expensive than other loans and are more attractive to lending institutions. The reason for this is since the property is owned outright, and not held by a mortgage, the lender has direct access to the property should it need to be repossessed.
Second charge secured loans are those loans where a property with an outstanding mortgage is used as security. For these types of loans, the mortgage company will have first access to any equity that is released from the property should the borrower default on the loan.
The lender will then be able to recover whatever funds are leftover to cover the loan repayment. Second charge loans are generally less attractive to lenders since they must share the recovery of the funds with the mortgage company.
Funding Amounts Available through Secured Loans
Generally, the amount of funding available through the secured loan channel is much higher than that of the unsecured channel. Since the lender has a guarantee the loan will be repaid, whether by the borrower or by repossession of property, they are much more willing to offer applicants higher amounts of money.
The best homeowner loans will offer up to 125 percent of the value of the property being used as security, most commonly between £3,000 and £100,000 although higher amounts are possible.
Interest Rates Associated with Secured Home Loans
There are many factors that play a role in what the interest rate will be for a secured homeowner loan. The amount of money being borrowed, the borrower’s credit history and personal circumstances as well as the value of the property being used as security will all factor into what the interest rate for the loan will be.
Secured homeowner loans for bad credit applicants will generally have a higher interest rate, but lenders, especially those who specialise in bad credit, are still willing to work with these borrowers.
As with any type of financing, it is important to compare different loan offers from different lenders in order to secure the best possible deal. Also, make sure to keep in mind that the APR advertised by different lenders may not necessarily be what all borrowers will be charged – since each individual’s unique circumstances are taken into account, it is possible that the APR charged to the borrower will be either higher or lower than what is being advertised on the television, radio, or in print from the lender.
Restrictions for Secured Loans
Generally, lenders who offer secured homeowner loans will not place any restrictions on what the funds being borrowed can be used for, as long as the purpose is considered legal. Many borrowers will use this financing to help consolidate other outstanding debts, such as other loans or credit cards, make renovations or upgrades to their home, or make a large purchase such as a car.
Before committing to a secured loan, make sure that the monthly payments including interest are doable on your budget.
Repayment Protection Options
Most lenders who offer secured loans will also offer borrowers the option of adding repayment protection to their loan. This protection will cover monthly payments for a set amount of time should the borrower not be able to make the payment themselves due to unemployment or being unable to work due to accident, injury, or illness.
Although this insurance comes at an added expense to the borrower, it can often provide peace of mind should the worst happen and the loan needs to be paid.
Secured Loans Also Available for Buy to Let Properties
Landlord and property investors are able to take out secured loans using a property they own and are currently letting out to tenants. Although not every lender who offers secured loans will work with landlords, some will, so it is important to shop around and find an institution that will fit your needs.
It is important to always remember that securing a loan against personal or business property is a risk, so make sure you are able to make the monthly repayment amounts offered in the terms of the loan.