The pros and cons of taking out a homeowner loan


The pros and cons of taking out a homeowner loan

Recently we explored the reasons for and against taking out a personal loan, to help you make an informed decision if this was something you were considering. In this blog post we will set out the pros and cons of a homeowner loan, so you can decide whether or not this option is right for you.

First, we’ll have a look at some of the negatives that you should consider before taking out a homeowner loan, and then afterwards we’ll discuss the positives. 

The cons

A homeowner loan is secured against one of your assets; your home.  Homeowner loans (also known as secured loans) are just like a mortgage, your lender takes a charge against your property and this acts as their security.  This means that if you fall behind on your repayments you risk losing your home.

Taking out a loan is a big commitment. Homeowner loans can last for many years, and, in some cases, as long as your mortgage. When you take out a loan you are committing to making regular monthly payments for the life of the agreement. It is important to remember that your circumstances could changes over the years and if you are unable to make your payments, you will damage your credit history and your home could even be at risk.

Borrowing can be expensive. You have to pay interest on whatever you borrow, so taking out a loan would work out to be more expensive in the long-run than if you saved the money instead. Remember that spreading the repayments over a longer term may reduce the monthly cost, but you could end up repaying more in total.

There may be early repayment charges if you try to repay your loan early. Although this depends on the individual lender, it’s not uncommon. You should check your agreement for this before applying.

Your chances of being accepted for another loan may be reduced. When you apply for credit, lenders will look at your income and your expenditure to assess if you can afford the new commitment you’ve applied for.  A homeowner loan will add to your regular expenditure and so may reduce your ability to access further credit for the life of the secured loan. 

For example, if you take out a homeowner loan and then your car needs replacing urgently you may find that you can’t get further credit to pay for a new car. This is because lenders would assess your income and expenditure and take the view that you can’t afford the additional repayments.

The pros

A secured loan could help you to afford something now that would take you a long time to save up for. If you need to create some extra space in your home to accommodate your growing family, for example, a homeowner loan could help you pay for an extension now and spread the cost over a number of years.

You could borrow a larger amount. Unsecured personal loans tend to be limited to a maximum of about £25,000.  With homeowner loans from Ocean, the most you can borrow is £150,000, which means secured loans are often used to fund bigger projects, such as funding an extension to your home.  How much you are actually able to borrow will depend on your own personal circumstances and how much equity you have in your property.

It may be easier for you to be accepted for a secured loan, especially if you have a patchy credit history. Whilst secured lenders will look at your credit history as well as whether you can afford the loan, they may be prepared to be more flexible than unsecured lenders because they will take a charge on your property as security.  Of course, this means that if you fail to repay the loan, they can take possession of your property.

Meeting all your repayments can help to improve your credit history. Providing you don’t miss any payments, your credit score should improve over the duration of the loan. This is because borrowing money and paying it back on time will show on your credit history and demonstrate to other lenders that you can use credit responsibly.

If you want more information on loans, head to our simple guide here >