Secured Loans: Key Features and Advantages
Loans come in two flavors in the UK: secured loans and unsecured loans. An unsecured loan can be obtained from a lender on the basis of a borrower's credit rating alone. No property is set up as security against the loan. In the UK, a secured personal loan is available to borrowers who are willing to risk real property as security for the loan. The property that is put up as security is called the collateral. If the borrower should default on the debt, the lender can recoup any losses by liquidating the property held as collateral.
Secured Personal Loan Advantages
- Easier to obtain
- Available in larger amounts
- Repaid over longer period
- Variable interest rate
Secured loans offer several advantages over unsecured loans. These loans are easier to get. The lender has some assurance that any money lent will be recovered one way or another. For those with poor credit scores, the secured personal loan may be the only way to obtain financing.
Secured loans are available for larger amounts than unsecured loans. In the UK, the average secured loan is around £25,000 but a homeowner can borrow in excess of £250,000 dependent on equity, while unsecured loan limits are much lower, at £25,000. For those with a heavy burden of debt from high interest credit cards, this higher limit can be a financial lifesaver.
The repayment period for a secured loan can be much longer than the period for unsecured loans. A longer repayment period gives a borrower an opportunity to lower the monthly debt bill. Since interest costs are directly determined by the amount of time the principal is in repayment, a longer repayment period will increase the interest costs of the loan.
The interest rates for secured loans are variable, which can give the borrower the opportunity to cash in on lowered interest rates over the life of the loan. However, any increase in the interest rate will be passed on to the borrower and will raise both the monthly payments and the total cost of the loan.
Secured Loan Considerations
Unlike unsecured loans, the borrower's property is at risk under the terms of a secured loan. Several considerations must be addressed before a borrower decides to take on a secured personal loan.
Not all property is equal. Lenders will look at the free equity of a property being offered as security. Free equity is the free market value of the property less the amount required to repay any loans or mortgages currently held against the property. Free equity will determine several key factors of a secured loan. The interest rate is affected by the amount of free equity, as is the total amount of the loan.
A secured loan's interest rate will also be determined by the borrower's credit score. A better score will result in more favorable terms for the borrower. For those with a good track record of mortgage payments, credit card bills and other indications of financial responsibility, a lower interest rate can make a secured personal loan a fast way to reduce personal debt.
Borrowers may discover that for secured loans in the UK, fast repayment is not an option. Secured loans do not usually allow the borrower to pay off the loan more quickly. Instead, extra payments are applied to the interest charges first, leaving the principal untouched. Borrowers should check the terms of their secured loans and discover if fast repayment will result in a boon or a burden.
Secured Loans: Online Resources
The Internet has created a booming market in both fast secured loans and online secured loan comparison shopping. Searching for secured loans online is the fastest way to compare rates from many lenders. Borrowing an idea from the insurance industry, some Internet vendors specialize in searching the available rates and terms of secured loans in the UK. For borrowers considering this type of loan, a fast online secured loan search can save significant amounts of money over the life of the loan.
