Secured Loans : An Introduction

By Michael Strauss

A secured loan is one where an asset is used to guarantee that the lender will be able to recover the money that's borrowed. The most common asset used to secure a loan is the borrower's home, although in principle anything of sufficient value could be used.

When a loan is secured against your home, the lender has the legal right to begin repossession proceedings should you fail to keep up with your repayments, which could ultimately lead to you losing your home over what could be a relatively small debt in relation to your property's value.

This risk of repossession is of course one of the drawbacks of secured loans, and one that should be made very plain to you as part of the loan application process, but there are plenty of positives to be found as well.

Credit Problems

The guarantee the lender has that the loan will be repaid in one way or another means that they are more willing to lend to people who've had credit problems in the past, or who don't fit the criteria of an ideal borrower (self employed people, those with variable or seasonal incomes etc). This makes secured loans available in many cases where other forms of finance are not.

The size of the loan can also in most cases be larger than that available with unsecured credit, and is usually limited only by the amount of equity you have in your home and your income and expenses. This ability to borrow large amounts makes secured loans ideal for debt consolidation, where existing debts are paid off using the loan, resulting in smaller overall monthly repayments and a simplified financial situation.

Secured Loan APRs

In terms of cost, secured loans vary widely. While people with excellent credit ratings may be able to get a rate comparable with the best-buy unsecured loans or mortgage (i.e. in the mid single figure range), it's more common to be offered something more in the region of 10%. In situations where there is some poor credit involved, this rate can rise substantially, and in the worst cases it could be as high as 20% or even more.

So who should consider a secured loan? If you're a mortgage payer with plenty of equity in your home, then a secured loan is a convenient way of unlocking some of that hidden value. Just be sure that you'll be able to keep up your repayments, as the risk of losing your home if you get into trouble is very real.