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Loans secured against a property, also known as homeowner loans or second-charge mortgages, allow homeowners with a mortgage to use the equity in their home as security to borrow larger amounts (over £10,000) or to borrow at more competitive rates.
There’s a little extra admin involved – like verifying the value of the property and the extent of any other borrowing secured against it – which can eat into lenders’ margins, making smaller loans less appealing. The process takes a little longer than an unsecured loan (perhaps a few weeks rather than a few days) but since there usually aren’t solicitors involved, it’s still typically faster than a regular mortgage would be. No offence, solicitors.
With a secured loan, you put up a personal asset as collateral – it could be a car, a boat, a collection of Star Wars memorabilia… but most commonly it’s a property. If there’s already a mortgage on that property (which in itself is probably the most common form of secured lending), then an additional loan against the property is known as a second charge.
Whatever the asset is, it stands to be repossessed if you fall behind on the loan repayments – that’s why you’ll always see/hear/read the standard “Your home is at risk if you do not keep up repayments…” warning on adverts for loans involving security. Repossessed assets are then usually sold off by the lender, enabling them to recoup their losses. If there’s any money left over once the lenders expenses have been covered, it’ll be returned to the borrower. Needless to say, as well as putting your home at risk, defaulting on a secured loan will hurt your credit score pretty badly – making it harder and more expensive to get loans in the future.
When you’re comparing loans, you might see the term “homeowner loan” cropping up, but it can be misleading. Some types of loan can be cheaper if the borrower is a homeowner, but that doesn’t necessarily mean that the loan is secured against the home. Before you take out any loan, make sure you understand what security’s involved. In this guide, we’re focusing on loans that are secured against your house.
Secured loans are perhaps most popular with those looking to consolidate debt, but can also be a way to access funds without disrupting an existing mortgage – perhaps for people enjoying a very low fixed rate or people whose credit rating has been severely damaged since taking out their mortgage.
The big banks don’t dominate the secured loans market (perhaps because they’re more interested in larger, traditional mortgages), instead you’ll see a large number of specialist lenders that are less likely to be household names – Optimum Credit is perhaps the largest of these.
Here are some of the key factors to bear in mind:
For a large loan, you’ll generally need to provide security in the form of a valuable asset. But if you’re looking to improve your odds of being approved for a good deal on a smaller loan and don’t want to put assets up as collateral, then options to consider include:
Secured loans can be a useful option when you need to borrow larger sums in a relatively short space of time. They give lenders the reassurance needed to approve larger loans and loans to people with less-than-perfect credit ratings. Before applying for a secured loan, consider whether you’re willing to take the risk of having your assets repossessed.
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