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The advantages and disadvantages of a secured loan

A secured loan is a form of borrowing which is secured against your property, so you must be a homeowner to apply. There are pros and cons involved, so it’s best to consider whether this option is right for you. It’s important to make sure you can afford your repayments for the full term of the loan, otherwise, your house could be put at risk of repossession.

4 min read
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Advantages of secured loans

You don’t need a perfect credit score to get a secured loan

There’s no set credit score needed to get a secured loan. Although you might find it more difficult to get a secured loan if you have a bad credit history, there are lenders who specialise in lending to those with poor credit scores. So getting finance is still possible.

Also, even if you have bad credit, you may have a higher chance of getting accepted for a secured loan compared to an unsecured loan. This is because, from the lender’s point of view, some of the risk is offset by the fact that your loan is secured against your property. If you don’t maintain your loan repayments they can repossess your property to claim back the funds owed.

You can usually borrow larger amounts with lower interest rates

Lenders typically feel more confident lending larger amounts of money at lower interest rates on secured loans compared to unsecured loans. Again, this is because they view secured loans as less of a financial risk.

Also, the more equity you have in your property, the more you may be able to borrow and at better rates. To work out how much equity you have, you need to deduct your remaining mortgage balance from the value of your property. You can find out an estimate of your house value on Zoopla.

You may be able to spread the payments over a longer time period

Secured loans allow you to spread the cost over a longer period of time, potentially making your repayments more affordable each month. Also, consolidating your debts means that you only have to make one payment per month, instead of juggling several payments to different lenders.

You can use your repayments to build up your credit score

If you maintain your payments on time, every time then you can build up a good credit score. This can take time and patience, especially if you have a low credit score to begin with. But it will be worth it in the long run, as you will have more credit options available to you.

Disadvantages of secured loans

You need to be a homeowner with equity

To be eligible for a secured loan, you need to be a homeowner. And you need to have enough equity (the difference in the value of your property compared to the amount outstanding on your mortgage) to cover the amount you want to borrow.

You do need a high credit score to access the best interest rates

The higher your credit score the better when it comes to getting your loan accepted, and being offered the most competitive rates. Lenders use your previous financial behaviour to predict your future behaviour, so if you have a good credit history, then they will see you as a low-risk, reliable borrower.

Read our ultimate guide to improving your credit score for more tips.

Borrowing more than you need could lead to financial difficulty

Secured loans tend to start from £10,000, but you don’t have to accept the amount you are offered by a lender. 

Only borrow what you need and what you can afford to pay back. Don’t be tempted to take on more debt than is necessary or you may risk getting into financial difficulty.

You could pay more interest overall if you spread payments

You can usually spread your repayments out over a longer period of time with a secured loan. But bear in mind that you could end up paying more interest overall as a result.

Your credit score can be damaged if you cannot maintain repayments

If you miss payments or make late payments, a record of this will stay on your credit report for 6 years. This can affect your credit score and your ability to get credit in the future. So make sure the loan is affordable before you take it out.

Your property could be repossessed if you don’t maintain repayments

Your house could be at risk of repossession if you don’t maintain your repayments on time, every time. Lenders can take this action in the event you default (miss 3-6 repayments).

It is important to make sure you can afford the repayments every month for the full duration of your loan. Remember to take any emergencies into consideration, such as car repairs for example.

Early repayment charges may apply

Also, check the terms and conditions before you enter into an agreement to see if any early repayment charges apply. For example, if you were to come into some money in the future, would you need to pay a fee to clear your debt off early? Some lenders apply charges to offset some of the money they lose in interest in this situation.

Credit applications show up on your credit file

Every time you make a credit application, a hard check will show up on your credit report. This can cause a temporary dip in your credit score. But if you make too many applications within a short time period, this could potentially put some lenders off. It can give them the impression that you are struggling with money and they wouldn’t want to put you into further financial difficulty.

So before you make any applications, it’s best to use an eligibility checker to find out the likelihood of being accepted. This only performs a soft search on your credit file, so it won’t impact your score, meaning you can use them as many times as you like.