Secured Loans Explained

 

As with a mortgage, secured loans enable you to borrow fairly cheaply by putting your home or some other asset up as security. You can also borrow more than you might be able to with an unsecured loan although if borrowing large sums of money you may be better off remortgaging as you may be able to get a better deal.

However, as the warning goes, "Your home is at risk if you do not keep up repayments on a mortgage or other loan secured on it", so don't go down this route unless you're absolutely certain that you can comfortably afford the monthly outlay. The roof over your head really is at risk if you fall behind on your repayments - a homeowner loan is effectively a second mortgages but, usually, with marginally higher interest rates.

Make no bones about it, should you default on a secured loan, the creditor is entitled to force the sale of your home to get their money back. Your mortgage lender, if you have a mortgage, will be paid first, followed by the secured loan creditor.

There are other major drawbacks with borrowing against your home. For a start you tend to pay off your debt over a much longer time frame. Indeed it may even run alongside your mortgage for the length of the term. Repaying a secured loan over a 20 or 25-year period ramps up your overall interest bill, so smart borrowers will organise a secured loan over as short a period as possible, in order to keep the overall cost to a minimum.

Interest rates also tend to be variable so they can go up or down at any time - somewhat of a risk for a borrower on a tight budget. Usually there is also an additional fee for arranging a homeowner loan because, for example, the Land Registry needs to be notified that you've borrowed against your property. And if you repay your loan early there may be very high penalties.