A secured loan may sound safe but if you fail to make repayments then you could lose your home.
The term “secured” means the lender can use your home as security to ensure it gets its money back – it doesn’t mean you have any security. It also means secured loans are only available to homeowners.
The reason lenders offer these types of loans is that by having the additional guarantee of your home, they can often lend to those deemed less likely to make repayments or lend larger amount of money, sometimes well over the £25,000 personal loan typical threshold.
Secured loans are also sometimes referred to as second charge loans. This is because the lender often has a “second charge” on your home.
If you fail to pay your mortgage, the mortgage lender has a first charge on your home, meaning it has first option to repossess your house or flat to recoup its money if you fail to pay. A second charge lender has second option.
The advertised rates on secured loan are sometimes lower than those on unsecured or personal loans, where you won’t lose your home for missing payments.
But don’t think lower rates make them cheap. Lenders have been known to increase the rate charged t their will, even when there is no change in the bank of England Base Rate, as rates are often variable.
Also, secured loans tend to be repayable over a long period, sometimes up to 25 years. So when you hear adverts stating they offer “low monthly payments”, while this is often true, it allows you to take even longer to pay it off. This means paying more interest than you probably think.
A £50,000 loan at 5% interest over 10 years would cost £13,600 in interest, compared to £37,600 over 25 years.
The amount you can borrow, the rate and the loan length all depend upon the equity you have in your property, and the lender’s view of your ability to repay.
So with high costs and the risk of losing your home, are these loans worth getting? Experts suggest they are often worthwhile as a last resort, if you cannot find alternative funding such as via an unsecured loan or by borrowing more on your mortgage.
Even if you want a secured loan, they are not always available during times of economic difficulty. In fact, during the credit crunch of the late noughties, most of the major secured loan lenders pulled out of the market.