Secured loans against your home to pay off standard debts is rightly seen as an evil beast yet, as a private property owner’s loan of last resort, in specific limited circumstances secured loans can be an acceptable solution.
By: Hitesh Khan/
Simply put, it is a loan only available to private property owners, where the lender can forcibly sell your house to get its money back if you can’t repay. The ‘secured’ bit means the lender gets ‘security’ not you, as if there are problems, it can repossess your home.
When we normally talk about personal loans from a bank or a cooperative, these are unsecured, which means there’s no automatic link to your home (so non-homeowners can borrow this way too).
Sadly it is becoming more common that for those in financial difficulty even unsecured lenders can get what’s called a ‘charging order’ on your home. This effectively means they have a call on the money from the sale of your house.
This doesn’t automatically mean it can push repossession though, there’s another court stage they’d need to go for and the courts are much more reticent to grant it on charging orders. Yet even with this, it’s much more difficult for lenders to take your home if its unsecured.
The important rule of thumb is, if everything else is equal, an unsecured loan is always preferable to a secured one.
Why would anyone want secured loans?
- Easier to obtain
Unsecured loans are almost always cheaper for those with decent credit scores, but secured loans provide lenders with security, so they’re more willing to lend to poor credit scorers.
- Big borrowing is possible
The maximum unsecured loan is smaller when compared with secured loans.
- Borrowing over a longer period
Secured lenders prefer loans to last longer to help offset hefty set-up costs, usually from five to 20 years. Unsecured lending is usually three to ten years. Borrowing for longer does reduce the monthly repayments, but substantially increases the total interest repaid.
Contrary to glossy ads secured loans aren’t an easy option for those with heavy debts. A home isn’t something to gamble with. These are purely loans of last resort. The only good reason for using them is to cut existing debt costs. Those considering secured loans for new borrowing or purchases should simply not do it.
Checklist before considering secured loans
- Credit card balance transfers – Credit cards are ‘unsecured’ and, used correctly, the cheapest borrowing possible, especially when shifting debt to new Balance Transfer Credit Card offers.
- Unsecured loans – Cheaper and less risky for those who can get them.
- Use savings – The interest paid on savings is usually far less than interest charged on borrowing, so paying off debts with savings makes sense. Traditional logic does say always have an ‘emergency cash fund’.
- Credit card reshuffle – It’s possible to cut the interest rate on existing debts even without getting new products. Many credit cards allow existing customers to move other debts to them at special rates. Correctly shifting balances and prioritising repaying expensive debts first creates substantial savings.
- Budget & reduce outgoings – Massive money saving is possible on everyday spending by moving to better products.
- Debt Counselling – For those consistently struggling with debts and meeting repayments, free personal help is invaluable. Do it as quickly as possible, the longer you leave it the worse it gets.
Get a handle on your existing debts first before considering a secure loan. List them on a piece of paper. Once you know the secured loan rate, draw a line across the page where this fits in. The secured loan should only be considered to pay off the more expensive debts above the line.
Don’t feel all debts should be consolidated into one. This is a common secured loan sales pitch, yet in isolation it serves no real purpose. Remember, if you’re repaying a higher rate or for longer, your lender makes more cash, you don’t make savings.
Finally, don’t borrow more than you need. Disgustingly some lenders tout, “why not borrow a little more for a holiday? You deserve it.” Don’t do it. Never treat secured loans lightly, take as little lending as possible. And most importantly if you think you won’t be able to make the repayments, don’t even start down this route, it isn’t worth it – see the free debt counsellors instead.
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