What to consider when applying for a secured loan
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Secured loans are a popular way for Britons to borrow large sums of money for everyday purposes including weddings, home improvements or even to consolidate their existing debts.
Your loan is ‘secured’ against something valuable that you own, typically your home or property, and you can borrow large amounts against it based on your equity and how much of the property you own. Importantly, your property is used as collateral and it could be at risk of repossession by the lender if you cannot fulfil your repayments.
Under the new covid way of living, there has reportedly been a 31% increase in applications for secured loans in the last year. In March 2021, over 2,000 applications were approved, worth just under £100 million.
With covid still looming, a secured loan can be an effective way to finance any home renovations, including an office space, loft conversion or a garden office too.
The average loan amount is around £50,000, but for some borrowers this may be just a few thousand pounds, and others it could be north of £100,000 to make a huge lifestyle change.
To make sure you have all the best information possible, we speak to David Beard, the founder of Lending Expert, who gives his tips on what to consider when applying for a secured loan.
Calculate how much you need to borrow
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Beard: “Consider the purpose of your loan and exactly how much you need to borrow for it, whether it is a home improvement or buying a new car.
"Secured loan rates can be low, starting from just 3.34% APRC, but if you borrow too much and for too long, you are just paying extra interest which you don’t need to.
"Take a moment to work out the costs, sit down and calculate how much you truly require and how long for. Can you top up the rest with income or savings?”
Can you afford repayments?
Beard: “Being able to afford repayments is key for this type of loan. Unlike an unsecured or personal loan, you are borrowing against your property or family home in this circumstance.
"If you are unable to keep up with repayments long-term and have exhausted every other kind of arrangement or repayment option, the lender could cease your property to cover their costs.
"Are you going to pay off your loan from future income, savings or inheritance? Being certain that you can repay is an important consideration.”
Have you improved your credit score?
Beard: “Having a good credit score could give you access to far lower rates and also boost your chances of approval.
"There are some quick steps you can take to improve your credit score. Start by getting a free trial from one of the main credit reference agencies or paying a small fee to access your credit report - since this will highlight any areas that you could improve.
“Some basics include adding yourself to the electoral register and closing down any store cards or credit cards that you do not use. It could offer a real boost and help you access a secured loan with a very competitive rate.”
Are you planning on moving or making other big purchases?
Beard: “Secured loans are typically repaid over long terms, such as 5, 10 or even 20 years. For some purchases, this can be a good way to spread repayment, especially for consolidating debts.
"You just want to make sure that you do not have any other big purchases coming up in the near future, such as a wedding, plans to move home or buy another property.
“Certainly if you are planning to move home, you may have to settle your secured loan beforehand, so it might be helpful to consider this and any other large expenses.”
Is a secured or unsecured loan better?
Beard: “Secured loans are definitely effective for borrowing large amounts of £50,000 or £100,000, especially if you have a valuable property and have built up some strong equity in your home. With the option to repay over 30 years, it is very flexible.
“Unsecured loans can be equally effective for borrowing up to £25,000, but this is usually better if you have a good credit score, since this will give you access to the highest loan amounts and the lowest borrowing rates (from 3% APR), plus, you won’t have to worry about using your home as collateral.”
If you are thinking of consolidating existing borrowing you should be aware that you may be extending the terms of the debt and increasing the total amount you repay. Think carefully before securing other debts against your home.
Your home may be repossessed if you do not keep up repayments on a loan or any other debt secured on it.
For more information and to check your eligibility for a secured loan, you can visit Lending Expert - or to speak with an advisor today by calling 0161 820 8099.