Guide to Secured Loans
Secured loans are one of the most popular – if not the most popular – types of loans in the United Kingdom today, offering a number of benefits to all those who take one out. There are a few different points that everyone needs to understand about this type of loan though before they take the step of taking a secured loan out.
What is a Secured Loan?
A Secured Loan is a loan that is secured as a second charge on your property. It can only be secured against your property and most be the second, not first charge. The first charge will usually be your mortgage. Some confusion often arises around the term as in the US a "secured loan" can be secured on cars or other assets; this is not the case in the UK where the term refers exclusively to second charge loans on a property/building.
Do I Need a Mortgage?
As surprising as it may seem, the answer is Yes. You cannot have a Secured Loan as a first charge, otherwise it would be a mortgage. So, as odd as it may sound, if you have a property that is owned without a mortgage, you can't raise a secured loan on it.
That's not to say you can't raise a loan on an unencumbered property, some firms will offer what they call "mini-mortgages" starting at £3,000 as a first charge on such a property. Technically speaking though, this is more correctly categorise as a mortgage (albeit a mini one) than a loan. Secured loans are the SECOND charge.
What About my Credit Rating?
The beauty of a secured loan is that a poor credit rating in no way precludes you from getting a loan, because the loan is taken out against the equity you have in your home – something that you already own. This means that a lender is satisfied that they can regain their money should you fail to meet payments.
Many people take out a loan of this type against their home in an effort to rebuild their credit rating. In this day and age credit is playing an increasingly large role in life and having a poor credit rating often means that you don’t have access to the things that you want or need. Therefore, building it up through a loan is often a great way to build your financial stability for the future!
How Much Can I Borrow?
Amounts up to £200,000 are available but it is really dependent on the amount of equity that you have in your home – i.e. how much of your home is actually owned by you, as opposed to how much is tied up in a mortgage. The maximum loan to value ratio that anyone can get on a secured loan is generally 85% (i.e. mortgage plus secured loan cannot exceed 85% of the value of your property), but in early 2012 some Lenders emerged to the market saying they will loan up to £10,000 regardless of LTV. These loans do come at a price but are available.
It is worth noting that the more equity that you have in your property, the better interest rates you will get. This means that even a small loan is perfect for those who have paid off the majority of their mortgage, as the interest payable will be amongst the lowest on the market. As with every type of loan though, make sure that you check around – different providers have different rates and this could save a lot of money in the long term.
How Long can Loans be Taken Out for?
One of the main advantages to this type of loan is that they are usually taken out over a long period of time, therefore meaning that the amount payable each month is comparatively small. They usually run from 5 to 20 years, whereas unsecured loans typically run from 1 to 7 years. It is up to the borrower to decide whether they want to pay less per month at a higher interest rate, or more with a lower rate. As always, the total cost of credit should be noted when making your decision and not just the monthly payments.
Choice Loans is a Secured Loan broker with access to whole of market deals. Complete the form opposite or contact us direct if you would like to apply.