Secured Loans : Apply With Care

By Michael Strauss

The adverts for secured loans you see on television are full of promises of a new financial start, and an end to money worries. The typical scenario is of a worried- or depressed-looking person suddenly finding the time to enjoy life again, all thanks to a quickly arranged homeowner loan. Unfortunately, this isn't quite the whole story.

Obviously, an article on a loan web site such as this isn't going to say that taking out a loan is a bad idea in principle, but it's unrealistic to expect that loans are a good solution for everyone, and this is especially the case for secured loans. There are several important points to consider before deciding to proceed with an application.

Secured On Your Home

Firstly, by their very nature, secured loans put you at risk of losing your home if you can't keep up with your repayments. Being in debt is no fun at all, but being in debt AND homeless is far worse, and you need to keep this possibility in your mind at all times when thinking about taking out a loan.

Secondly, secured debt consolidation loans usually rely on spreading the debt repayments over a fairly long term. Although your monthly payment might be less than your current total, you'll probably and up paying more in overall interest before your debt is cleared.

New Debts

Another potential problem is that clearing up your finances with a secured loan can give you the illusion that your debt problems have been permanently solved, when in reality all that you've done is release the pressure a little by spreading your payments out over a longer period. This illusion might in fact tempt you into building up new unsecured debts such as credit card spending and the like, leading to an even worse situation than before you took out the loan in the first place.

Equity

There's also the question of equity in your home. A secured loan will lessen the difference between the value of your home and the amount of money you owe on it. A fall in property prices such as many experts are predicting is just around the corner could leave you trapped in negative equity, where the debt secured on your home is larger than the price you could get for it on the market.

Having less equity will also make it more difficult to get a good remortgage deal, an important consideration in the current economic conditions, especially if you're currently on a fixed rate deal which is nearing its expiry date.

None of this is to say that you should necessarily avoid taking out a secured loan - they can still be a very valuable tool in sorting out your finances. You just need to bear the potential drawbacks in mind when making your decision, and to take the sunny, happy, TV loan adverts with a pinch of salt.


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