What exactly is a secured loan?

If you are looking into the different types of loan you can get, a secured loan is an option. But, what is it? These loans are a loan where you put up some kind of security- such as your home, for example- when you take out the loan. This is why they are very often known as homeowner loans as well. If you do not have a home to put up as a form of security, then you will not be eligible for the loan. 

Secured loans will give the lender the security, not you. So it is much, much better to take out a normal and unsecured personal loan than a secured loan on your home. 

All you need to really know about this is that if you do not or can not pay the loan back in time, then the lender can apply for a court order to sell your home in order to get back the money they are owed by you. 

This is why it is rarely a good move. While you do get the loan, you could also possibly lose your home as collateral in the event you cannot pay the loan back in time. 

How exactly do secured loans work? 

Secured loans are not unlike personal loans in that they allow you to borrow a particular amount of money over a set term. You then repay your lender in installments, which are fixed at the same level for the duration of the loan. Secured loans are different from their unsecured alternative because the amount you borrow is secured against an asset- which is typically your home. This means that the lender can take possession of your home if you default on the loan. 

Since the asset is typically a home, these loans are often called homeowner loans or second charge mortgages, they are riskier than unsecured loans, however it is not all bad. As the loans represent less risk to the lender due to the secured asset, meaning the rate of interest charge is typically much lower than you may find with an unsecured loan. 

However, for more information on exactly how these loans work, and for more information on what kind of loan may be best for you check out the loans from CreditNinja.

What are the advantages of a secured loan?

This might all sound a bit bad for you, the possibility of losing your home in the event that you cannot pay the loan back on time may seem a bit off-putting, however, it is not all doom and gloom and like any loan, there are many positive aspects to it. If there were no advantages, then it would likely not exist as an option. 

One of the advantages of this type of loan is that you can often borrow a larger amount than you would otherwise be able to through other credit options. These can also be more appealing than other loan types as it has much longer repayment periods, so monthly repayments are lower. 

Since the loan is secured against an asset (your home) the lenders will regard this loan as a less risky type and thus interest rates are lower. You will also be less likely to be turned away if you have a poor credit score, although a poor credit score may still result in a higher interest rate in this case. 

Why would you want a secured loan? 

Knowing all this may make you wonder why anyone would opt for a secured loan. Well, for a start they are easier to get, they are cheaper for those with decent credit scores, however due to the collateral here lenders are more willing to lend to those with poor credit scores. 

You can borrow bigger with a secured loan, and you can borrow for a longer period of time as well, even from five to twenty years! They offer lower monthly payments for this reason, which is even more tempting for those who are already struggling with debt and loan repayments. However, do not get enamored by claims of ‘manageable repayments’. The reduction of monthly repayments can seem attractive, but it does mean you will be borrowing for longer, thus increasing the interest that you are repaying. 

Are there alternatives to a secured loan?

`Most would warn against getting a secured loan, and we side with that opinion, so always check out your other options first. If you need to cut the cost of existing debt, try to use any savings you have first. Look at balance transfers and, of course, think about unsecured loans. While the insecurity does come with disadvantages, at least your home is secure and the loan payment scheme is more straightforward. Always weigh up all your options before opting for a loan.