Secured loans: Questions & answers

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Q&A: What is a secured loan?

A secured loan is a type of debt available only to those borrowers able to pledge an asset, more often to those who own a property or hold a mortgage on a property. This asset is called collateral and can also represented by jewelry, vehicles, real-estates. Some people also call them property secured loans.
A secured loan can be a very useful and efficient short or long-term financial solution. The main disadvantage of a secured loan is the risk it holds over the property secured. This can be lost if the borrower defaults.

Q&A: What are the advantages of secured loans?

 

As we have seen above, secured bank loans place a risk over the collateral. Unsecured loans are somewhat risk free, but they have many drawbacks. Secured loans are a flexible way for homeowners to use some of the equity built over the years. Compared to unsecured loans, secured loans bring security and comfort to the lender, which translates in lower interest rates, flexible terms and more convenient repayment plans for the borrower. Getting a secured loan can also bring more money, compared to unsecured loans.

Q&A: When do you need a secured loan?

A secured loan is required when the amount provided by unsecured loans is insufficient. Some people apply for a secured loan to benefit from the lower interest rates or because their credit is damaged and otherwise would be charged much higher interest.

Q&A: Can you use them for any purpose?

 

Secured loans ca be used to consolidate an existing debt, to refinance an expensive debt (credit card) to a much lower interest rate. They can be used for anything, but you should use the money wisely. Don’t use them to pay bills, vacations or electronics, but instead invest them, such as in home improvement.

Q&A: How to get a secured loan?

 

Before you apply for a secured loan, it’s best to get an estimate on the property you are presenting as security. This way you will get an idea about how much money you can borrow. Shopping around is always wise. The internet is a very fast and cheap way to compare lenders and offers. Once the shopping is over, you can apply directly by phone, internet, post or a personal visit to their office. For some people, it is more comfortable to seek the advice of a finance broker. This way you may benefit from their expertise in deciding what product is more suitable for you, and, in some cases, may bring you a better deal as some products are available only through intermediaries.

Q&A: How long does it take to get approved?

 

Each case has its own characteristics. Normally, the consent of the first mortgage lender is required to register the secured loan on your property title and so the lender is unlikely to proceed before consent is obtained. So taking in consideration this and other circumstances, a secured loan may be obtained within 2-4 weeks.

Q&A: What factors influence negatively?>

 

In order to avoid a fraud and for the lender to evaluate your credit worthiness you will be required to consent to a search at a Credit Reference Agency. Here are some of the factors that can have an adverse effect on your application: bankruptcy, low income, frequent job changes, frequent address changes, other debts, court judgments. Secured loans are available even for people with bad credit, if they have enough equity in their property. In some cases though, low credit score can translate in higher interest rates.

Q&A: What are the risks of a secured loan?

 

Secured loans offer many benefits, such as: borrowing high amounts of money, low interest rates, small affordable monthly payments, the possibility of rebuilding your credit score. Still, they are some drawbacks that must be mentioned: the borrower might be tempted by the high amounts and forget that a secured loan is a long term commitment. In case he fails to repay the loan, the lender is entitled to repossess the property and sell it.

Q&A: How can I protect my payments against unforeseen events?

 

Protection measures against specific events like unemployment, disability or sickness can be taken through the Payment Protection Insurance (PPI). Before purchasing this product is best to seek independent advice as PPI may not be suitable in every circumstances. The policy will cover your payments for a fixed period (eg. 12 months) in case the insured event will take place.
Another option is to consider enough life insurance to cover all your payments in case the worse should happen.

Q&A: What about secured loan rates?

Due to security, the bank is able to provide more attractive interest rates. These will always be smaller compared to unsecured loan rates. But secured loan rates are also influenced by the borrower’s credit score and the length of the repayment period. The longer the period, the smaller the interest rate.

Last words:

Since you do not purchase financial products of this type frequently, it is virtual impossible to know what to choose among hundreds of loans without a serious research. Secured loans represent a major commitment so it is best to seek independent, impartial advice to help you find the product that suits you better.

 

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