Getting a secured loan is the way to go if you can’t qualify for personal loans. Perhaps, you’re bogged down by multiple debts and have a high debt-to-income ratio. Sole proprietors often have to seek personal loans but end up not getting them— because lenders view them as high-risk. Traditional lenders will also disqualify borrowers with poor credit scores.
You instantly qualify for a secured loan if you have collateral. The rules are quite simple; you get the loan based on the value of your asset. If you don’t pay back, you lose your asset. On the positive side, secured loans can help you save money.
What is an unsecured loan?
Unsecured loans are also called personal loans. The lender doesn’t ask for security. The interest rate is mostly fixed, but some lenders offer both fixed and variable rates.
Which assets are used as collateral for secured loans?
Lenders require property or an existing mortgage. Some accept vehicles, savings accounts, fine art, paper investments, etc. The types of property you can use for secured loans include; flats, maisonettes, brick houses, high-rise properties, owner-occupied rental properties, non-standard constructions, etc.
Ways secured loans can save you money
#1 Cheaper than personal loans
Secured loans give the lender added insurance that reduces their level of risk. They’re then willing to offer lower interest rates. You’ll get a fixed rate for the first 2 to 5 years. Afterward, the rates can go up or down. Lenders also offer secured loans to those with poor credit scores ,see here for more info, CJs, and even defaults.
Lenders charge more interest on unsecured loans. If your credit score is average, your loan might be more expensive.
#2 More cash, flexibility and longer repayment periods
Lenders can offer more cash for secured loans with the loan amount ranging from £5k or £10k to £500K or £1M. Most secured loans are all-purpose, so you can spend the money as you wish. For instance, some use them for debt consolidation, home improvements, buying new cars, etc.
You get less money with personal loans. Typically, the loan amount ranges from £1K to £50,000. If you need more unsecured credit, you might take out several personal loans, which increases your costs. In most cases, though, the money must be pre-approved for a specific use such as the purchase of a car.
The repayment period is also important to factor in; secured loans come with longer repayment periods from 3 to 25 years, allowing you to make small gradual repayments. Personal loans last for 1 to 7 years, with the longest terms at 10 years.
#3. Secured loans for debt consolidation will help you save money
Consolidating your debts involves taking out a larger loan to repay smaller loans. Some lenders offer secured loans for debt consolidation, allowing you to write off debts above £5,000 instantly.
You save money by consolidating your debts. First, interest and charges are stopped from piling up; you also stop getting harassment calls from creditors demanding their money. Second, you’ll be making one single repayment each month towards your existing credit card, council tax, personal loans, HMRC debts, etc.
Tips on applying for a secured loan
Secured loan lenders examine your circumstances and treat each case separately. You’ll be asked for supporting documentation when you apply, including proof of income, wage slips, account statements, etc. The lender might carry out a hard search on your credit file. If you’re not approved, it’ll leave a mark that may discourage future lenders.
Consider using eligibility checkers to determine if you’re going to be accepted before you even apply. They’ll look at your credit file, but in this case, it’s a soft search.
Ask for a quotation from the lender before you apply. If the lender offers quotes, they might ask for more details, for example, the loan amount you need, repayment period, property value, and mortgage balance. Quotation searches won’t negatively impact your credit file, fortunately.
Compare Annual Percentage Rates (APRs) on different loans and Loan-to-Value (LVTs)
Try as much as possible to compare APRs from different lenders. You can use comparison websites. The loan-to-value ratio can also tell you the loan amount you can get. For instance, if the LVT is 70% and the appraised value of your property is £100,000, the loan amount comes to £70,000.
What happens if you don’t keep up with the repayments?
You lose your home, and the lender will sell it off to recover their money. You might have to pay back the difference if your house sells for less.
Simple Conclusion
Secured loans are always cheaper and more favorable than unsecured loans, however, you must keep up with the repayments or risk losing your property.
