Wednesday, 15 January 2014

Secured loans, and in which case should I take out one?

A secured loan is a loan for which you put down some asset as collateral. Typical examples of secured loans are mortgage loans, for which you put up a house as collateral for a loan that you use to pay out a house. Of course, you can take mortgages for houses that have previously been paid off, in order to finance something else, like a business venture.The important thing is that you are putting down an asset (typically your home), as an item against which the loan is secured. If you fail to make your payments, the bank can repossess the asset, according to the contract. That is why, if you are willing to take a secured loan, you should be sure to get a loan at much more favourable terms than if you took an unsecured loan.   

Typically, the asset that you are securing the loan against is of greater value than the loan itself. The more instalments you pay, the bigger the difference between the two values, the more you stand to lose if the bank repossesses your asset. That does sound quite bad, and it is understandable that people are reluctant to take out secured loans. The notion of the bank taking over a home at some point is quite unpleasant. But bear in mind that the bank usually does not like torepossessassets, it’s an expensive and complicated procedure, so they like to avoid it. The bank always prefers hard cash. For that reason, if you have problems with instalment payments the bank will offer you alternative payment plans rather than taking your property.

Still, why should one take out a secured loan and risk losing their home? The reasons are quite simple. Since the loan is secured, and with an asset larger that the loans worth, the bank looks upon it as a low risk investment, so the conditions are much more favourable for the client: the interest rates are much lower than for the unsecured loans, repayment periods are much longer, and amounts that can be borrowed are larger. Thus, if you need to borrow a substantial amount of money that you want to pay off during a long period of time, and you have an asset that you can put up against that loan, then you should probably take out a secured loan. If you pay your instalments regularly, you have nothing to worry about (in most cases).

That is why you need to carefully calculate if you would be able to pay the instalments on time. Sure, a loan of £500.000 sounds great, but do you have the appropriate collateral, and will you be able to pay large instalments? Carefully measure your financial capabilities, carefully research individual loan offers, and then decide.

That said, I should probably warn you not to make too many credit applications just for the purpose of your research. Every time you apply for a loan, your credit history gets checked, and your credit rate might be lowered. So do your research before applying, read websites, use credit calculators, and then go speak to a banker.


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  2. Of course, one of the things that you have to carefully consider before acquiring a loan is looking over your financial capabilities if you can or cannot pay them afterwards. I believe most lenders would prefer an asset as a collateral for most loans which I think is just reasonable. Thanks for sharing this post Claire, all the best.

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