There a 2 main category of personal loans available on the market today. The personal loan which is the common unsecured type of loan you’ll see typically offered by your high street bank or building society, and the secured loan which is only available for homeowners and buy to let landlords.
This article will explain what secured loans are and when you might need one, and we’ll explain how they differ from the range of unsecured loans you’ll typically see in the market place today.
Here are the all the facts you need to know:
- They are often referred to as homeowner loans as they are only available to those who own their own home. Both terms mean the same thing and are simply referred to and presented differently.
- They are similar to a mortgage in that the loan amount is security against your property. This could either be your home or a buy to let property. This means that the property becomes collateral for the loan.
- Similar to a mortgage lender, the secured loan lender will only borrow the applicant up to a limit based up loan to value percentage. For example the highest loan ratio currently available for smaller secured loans of up to £15,000 is 95% loan to value. The higher LTV you require the more you can expect to pay in interest charges for your loan as these types of loans carry more risk to the lender.
- Currently as of July 2015 the cheapest rates for secured loans start from 3.7% APR and rise to in excess of 30% APR for applicants with a poor credit record. The best and lowest rates are only reserved for applicants with an excellent credit score and who require a low property loan to value ratio of 70% LTV and less.
- They can be found, compared and arranged online in the same way most other financial products can. Many of the well-known and most popular financial comparison sites allow you to compare the loans on offer. They display the rates and details of each product so you can compare and choose the best loans online.
- They can be taken out over a longer period of time when compared with unsecured loans. A secured loan can be repaid over 3 – 25 years, while in comparison unsecured loans are 1 – 7 years typically.
- They are generally larger loans starting from £5,000 up to in theory Millions of pounds depending on the property to act as security and the affordability of the borrower to repay the loan. In comparison an unsecured loan for most lenders will have a maximum borrowing limit of £25,000.
- They carry more risk for the borrower as in the event you were unable to meet your loan repayments you home could be at risk of repossession. Your home could be repossessed to then sell and to repay back what you owe to the lender, plus the total of any interest and fees due.
- The most popular reasons why people take out a secured loan is for home improvement works such as home extensions, new conservatories and kitchens. Borrowers also use larger loans to consolidate existing and more expensive debts to make their loan repayments more affordably and easier to manage.
- If you have a low credit score or a history of bad credit then you have a greater chance of getting this type of loan when compared to a regular unsecured loan. This is because you’re able to provide the lender additional security and therefore this reduces the risk to the lender, which then in turn enables them to borrow you the money you need.
- Loans for self-employed people, on benefits and pensioners with repayment terms available up to the age of 85.
- Secured loans are organised by loan brokers who act as intermediaries between you the borrower and the lender. They are able to quote you the loan you require and will also deal with any issues on your loan application. Loan brokers charge a fee for this service which is generally up to 15% of the loan amount and varies depending on how much you wish to borrow. The broker and any lender fees are added to the loan amount.
- As part of the loan application the lender will require a home valuation is carried out to ensure there is adequate security for the loan. With this in mind, secured loans can take a little longer to process and arranged when compared to an unsecured loan.
- Like an unsecured loan the lender will require a credit check and will carry out an affordability test to ensure you can adequately afford to meet the loan repayments while taking into consideration any of your existing loans or credit commitments.