What are Secured Loans?
A Secured Loan is a loan which uses some sort of asset as a security for the loan. The most common type of security is a house, usually the borrower's home, although other items could be used, for example a car ( this would be the security used in a car finance agreement).
The secured loan is secured against the value in the property, above the level of any outstanding mortgage. The phrase "Secured Loans" may lead the borrower to believe that there is some level of security for themselves. This is not the case however. The security is actually for the secured loan lender, who is able to claim the outstanding balance of the secured loan from the secured property, should the borrower default on the repayments. The secured loan lender has the legal right to force the sale of the property if necessary to reclaim the balance of the secured loan.
What are the advantages of Secured Loans?
As the secured loan is secured on property, the total risk presented to the secured loan lender is reduced and therefore the rate of a secured loan tends to be lower than that of an unsecured loan.
The term of the secured loan is also able to be spread over a longer period of time, which has the advantage of reducing the monthly repayments. If a borrower has a poor credit rating, or has had financial problems in the past, they will be more likely to be accepted on a secured loan for the reasons already stated.
What are the disadvantages of Secured Loans?
As the secured loan is secured against the borrowers property, it is likely to take longer to arrange than an unsecured loan and could also involve additional costs, such as valuation and legal fees. If the secured loan is taken over a longer term of years, although the monthly repayments will be lower, the overall cost of the secured loan could be significantly greater than one taken out over a shorter period, as interest on the secured loan will be payable for longer.
The biggest risk with secured loans is that due to the fact that it is secured on the borrower's home, the secured loan lender has the right to force the sale of the property to reclaim its losses in the event of the borrower defaulting and the borrower should be aware that: your home could be at risk if you do not keep up repayments on your mortgage or other loans secured on it.
Are secured loans common in the UK?
Over the last few years' secured loans have become an extremely popular way for UK borrowers to attain credit. Analysts believe that by 2013 the UK secured loans market will be worth approximately £11 billion pounds. The primary factors used to explain this growth, which have already been touched upon within this guide include: -
• The ability to borrow larger amounts, over longer periods of time.
• The ability to source a competitively priced loan, regardless of credit history.
However there is one other factor, which also plays a vital part in the growth of this particular loan type... the housing market. The vast majority of applicants realise that secured loans provide the ideal vehicle to release equity from their home, especially if market conditions have been favourable. However, if economic factors were to have an adverse effect on house prices, and equity levels were to decrease as a result, it would be highly likely that the secured loans market would slow if not even decline.
Posted 13/12/2009 16:49:39 |
