The pros and cons of secured loans

Many people across the UK have benefited from a secured loan over recent years. Rising levels of equity stemming from rocketing house process has given many more people far more financial leverage when it comes to borrowing against their home, and many homeowners have taken advantage of the situation in order to get affordable finance to suit their needs.

A secured loan is a loan that is secured against your property, and therefore you do have to be a homeowner in order to qualify for one of these loans. You will usually need to have some levels of equity in your home, and you can work this is the market value of your home minus any outstanding mortgage or other loans secured on it. The amount that you will be able to borrow – and your eligibility to borrow – will depend on factors such as your equity levels, your income and outgoings, your credit rating, and your employment status. These factors will also determine the interest rate that you are charged by the lender.

It is important to remember that although secured loans can be a very effective way of borrowing money there are also risks involved with this type of loan. Therefore before you commit to a secured loan it is important to weigh up the pros and cons in order to make a more informed decision with regards to whether you should take this type of loan or not.

The advantages

* A secured loan is an effective way for homeowners to borrow money at affordable rates. The increased levels of equity in homes today makes it easier for homeowners to get finance secured against the home, enabling them to raise the money that they need.

* You can enjoy greater borrowing power with a secured loan, although the exact amount that you can borrow will depend on factors such as your equity levels, your income and outgoings, and your financial and employment status. Some lenders will offer a loan of the full amount of your equity, some will lend up to a percentage of your equity, and there are some lenders that will allow you to borrow over and above your equity levels.

* Secured lenders offer longer repayments periods, often up to 25 or 30 years. This means that you can spread your loan over a longer period, and this can help to keep repayments down to a minimum. Your age will partly determine whether you are able to borrow over the maximum term offered by the lender.

* Secured loans are often available to those with bad credit who cannot get unsecured finance because of their low credit rating. Because the loan is secured the lender can afford to take a greater risk on higher risk customers. However, you will be charged a higher rate of interest than the standard in most cases.

* You can get secured loans for all sorts of purposes, such as home improvement loans, consolidation loans, loans to purchase a new car or pay for a holiday, wedding loans, and more.

The disadvantages

* Taking a secured loan out over a long period of time means that you will be in debt for a long time. If you want to repay the loan early or switch to another lender at a later date you may be charged hefty penalties, so this is something that you should check when you take out the loan.

* Taking out a secured loan could tie you into negative equity in the event that house prices fall. Negative equity is where you owe more on your property than the property is worth, so if you were to sell your home you would still owe money on it even though you no longer owned it, which would tie you to the property.

* A secured loan is a huge commitment and is secured against your property. If you default on repayments and fall into arrears you will not only adversely affect your credit but you could end up losing your home altogether.

* You could end up paying a lot of interest on a secured loan over the full term if you take it out over a longer period of time, but could find yourself in a catch 22 situation because of the cost of penalties if you decide to refinance or pay off the loan early. Always check and early redemption costs when you take out this type of loan.

* Although you are more likely to get a secured loan than an unsecured loan if you have damaged credit, you may find that the interest rate that you have to pay is significantly higher than those with decent credit would pay, and this could cost you a small fortune over the term of the loan.

One of the major risks that you need to bear in mind with secured loans is that your home could be at risk if you do not keep up with repayments on it, and therefore you should only consider a secured loan if you are confident that you can keep up with repayments. If you choose a variable rate loan you should remember that your interest rates could rise, and this could mean higher monthly repayments.

Source:http://www.thriftyscot.co.uk/money/112007/the-pros-and-cons-of-secured-loans.html