The Advantages and Disadvantages of Secured Loans

Secured loans are ways to borrow large sums of money and pay it back over an extended period. Usually reserved for homeowners only, these loans let you offer your property as security and are easier to obtain than personal loans.

While secured loans have plenty of benefits, there are also some drawbacks to consider. Before consulting a secured loan broker, it’s important to weigh up the pros and cons so that you can make an informed decision.

If you own equity in your property, you could be eligible for a secured loan. Any financial product requires careful consideration, but these loans offer multiple benefits, including the amount you can borrow and the fact that they don’t rely on your credit history.

Accessibility

There are many differences between secured and unsecured loans, but one of the most prominent is how each relies on your credit score. With a secured loan, you’re offering your property as security for the lender, which means a less-than-excellent score isn’t usually a dealbreaker.

While some lenders might introduce shorter repayment terms and higher interest rates, secured loans are much easier to obtain than personal loans.

Flexibility

Another key advantage of secured loans is that you can use them for most purposes – except gambling. Because you can borrow a larger amount, these loans are ideal for extensive upgrades to your home and consolidating debts.

However, if you’re planning on small expenses like going on holiday, opting for a personal loan might be the better option as you can borrow less and pay it back over a shorter period.

Repayment terms

Secured loans often come with better repayment terms, as the lender has security in the form of your property. While unsecured loans are typically capped at £25,000, the amount you can borrow with a secured loan depends on your equity.

Many providers offer loans that go up to £500,000, making them ideal for large purchases or investments. The repayment terms also last years instead of months. If you use the loan to consolidate existing debts, you could enjoy lower monthly repayments.

Lower interest rates

Many lenders base interest rates on your credit history and affordability. Even if you have a low credit score, you can still access reasonable rates as you’re offering the property as security.

However, it’s important to remember that a history of defaulting on loans could still impact your interest rates, but – in most cases – they’ll be lower than with a personal loan.

Build your credit score

Getting a secured loan can also help you improve your credit score, opening up more future financial opportunities. Your score will gradually increase as long as you make your monthly loan repayments on time.

People with multiple debts often have poor credit scores, but consolidating them and paying one monthly fee makes debt easier to manage.

If you own equity in your property, you could be eligible for a secured loan. Any financial product requires careful consideration, but these loans offer multiple benefits, including the amount you can borrow and the fact that they don’t rely on your credit history.

Accessibility

There are many differences between secured and unsecured loans, but one of the most prominent is how each relies on your credit score. With a secured loan, you’re offering your property as security for the lender, which means a less-than-excellent score isn’t usually a dealbreaker.

While some lenders might introduce shorter repayment terms and higher interest rates, secured loans are much easier to obtain than personal loans.

Flexibility

Another key advantage of secured loans is that you can use them for most purposes – except gambling. Because you can borrow a larger amount, these loans are ideal for extensive upgrades to your home and consolidating debts.

However, if you’re planning on small expenses like going on holiday, opting for a personal loan might be the better option as you can borrow less and pay it back over a shorter period.

Repayment terms

Secured loans often come with better repayment terms, as the lender has security in the form of your property. While unsecured loans are typically capped at £25,000, the amount you can borrow with a secured loan depends on your equity.

Many providers offer loans that go up to £500,000, making them ideal for large purchases or investments. The repayment terms also last years instead of months. If you use the loan to consolidate existing debts, you could enjoy lower monthly repayments.

Lower interest rates

Many lenders base interest rates on your credit history and affordability. Even if you have a low credit score, you can still access reasonable rates as you’re offering the property as security.

However, it’s important to remember that a history of defaulting on loans could still impact your interest rates, but – in most cases – they’ll be lower than with a personal loan.

Build your credit score

Getting a secured loan can also help you improve your credit score, opening up more future financial opportunities. Your score will gradually increase as long as you make your monthly loan repayments on time.

People with multiple debts often have poor credit scores, but consolidating them and paying one monthly fee makes debt easier to manage.

So, now that we’ve covered the pros of secured loans, it’s time to look at their downsides. As with any financial product, taking out a secured loan is a significant decision that nobody should enter into lightly.

Understanding the following disadvantages can help you determine whether secured borrowing is right for your needs.

You’re risking your property

It’s vital to remember that offering your property as security comes with some risks. For example, if you default on the loan and fail to make the agreed-upon monthly repayments, the lender has every right to repossess your home.

Before signing a secured loan agreement, you should consider your current and future financial situation and evaluate whether you’ll be able to keep up with the long-term monthly repayments.

It’s tempting to borrow a lot of money

If you own a lot of equity in your property, you might be tempted to borrow more than you need. While this might not seem like a significant problem at first, you’ll have to balance higher monthly repayments over a longer period.

Whether you’re using the loan for home improvements or debt consolidation, it’s important to consider what you need to borrow and avoid any temptations to borrow more.

You could put your credit score at risk

Even though secured loans aren’t as reliant on your credit file, failing to keep up with your monthly repayments could severely limit your financial future. Having a bad credit score makes it harder to obtain loans and mortgages in the future.

You might pay more interest

When choosing between secured and unsecured lending, the interest rates will play a key role in your decision. While you’ll pay a lower monthly amount with a secured loan, the extended repayment terms often mean you pay more interest overall.

It’s really a case of deciding which is best for your needs. Many people prefer lower interest rates but longer repayments because it makes budgeting more manageable, while others want to clear their outstanding loans.

Early repayment fees

Most lenders will let you repay the loan early, but you’ll need to factor in any early repayment charges. These fees vary in amount, but the lender should clearly outline them before you agree to the loan.

When getting a secured loan, the lender might ask for other information, although it depends on the company you choose. Being able to provide the following details will speed your application up:

• Your Equity: All lenders have an LTV (loan to value) ratio, which is a percentage of your available equity. If you don’t own a large amount of equity, you might find that another loan type is best for your needs.
• Your Finances: Can you afford your monthly loan repayments? Evaluate your current and potential future financial situation and factor in any expenses.
• The Terms: Read the loan agreement carefully before signing, as it’s essential to understand the interest rates, repayment schedule, and any early repayment charges.
• The risks involved: Secured loans are a serious financial commitment. If you default on the loan, you could lose your collateral.
• Alternatives: Plenty of alternatives to a secured loan, including personal loans and bridging loans, might suit your financial goals more.

A secured loan can open up multiple doors and help you manage your finances more effectively. If you feel that you can make a secured loan work, Believe Money has access to a network of lenders that judge each case individually.

Please get in touch with our brokers today and enjoy no upfront fees.