What is a Secured Loan?
One of the most popular types of borrowing is the secured loan. This kind of loan is when you borrow money from a lender such as a bank, and put up an item such as your house or other valuable property as collateral against the value of the money that you borrow.
A secured loan is typically offered at a lower interest rate than an unsecured or personal loan for the same amount, because the risk to the lender is much smaller. If you default on your repayments of unsecured credit, the lender would be at risk of losing the total amount outstanding. When you secure your borrowing against a physical item, such as a house, the lender can take possession of the items that you put up as security and then sell them in order to cover the amount outstanding.
The interest rate offered for secured loans is worked out to take into account the value of the asset that is being used as collateral. For example, if you borrow against your house, the interest rate will reflect the fact that the value of your home is likely to rise, and in the event that you are unable to pay your debt, the lender will find it easy to recover the outstanding balance against the value of the property usually without having to seize the asset.
On the other hand, a loan that is taken out against a smaller value item, or one that goes down in value, such as a car will require a higher interest rate, as the risk to the lender of not being able to recover the full outstanding balance if you default is much higher.
There are many types of secured loan available, and many different purposes why people take them out. One of the most common forms of borrowing is to pay for a large single item such as a car, holiday, loft conversion or home improvements. In the case of a car, the secured loan may be offered as a finance package by the car dealership, often with attractive repayment terms or a particularly low interest rate offered as an incentive for taking out the loan. They often have more clauses and penalties than one from a loan provider however, sometimes preventing you from selling the car until the debt is cleared.
Another reason why people might take out a secured loan is in order to consolidate other debts into a single repayment. If a person has a number of outstanding debts including credit cards, a personal loan, and store finance packages, it may be possible to take out a single secured loan against the value of an asset such as a house. Because the interest rate that can be negotiated for secured loans is much generally much lower than would be offered for unsecured borrowing, it is possible to reduce the overall monthly repayment amount, because of the savings that are offered over the term of the loan by the lower interest rates.
A secured loan is best suited to a home owner with a reasonable amount of equity held in their property who wants to borrow a substantial amount of money for a specific purpose, or to reduce the repayments on other borrowing.