Advantages and disadvantages of secured loans

A secured loan is a form of borrowing that's secured against your property. So, you must be a homeowner to apply. There are pros and cons of secured loans, so it’s best to consider both to decide whether this option is right for you.

4 min read
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Advantages of secured loans 

You can use it for any legal purpose 

A secured loan can be used for any purpose you like (as long as it’s legal and not gambling). Common uses include debt consolidation, home improvements, or both.

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 poor credit history, there are lenders who offer bad credit loans. So, getting finance is still possible, albeit better credit ratings often attract a lower rate of interest.

Also, you may have a higher chance of getting a secured loan compared to an unsecured loan - even with bad credit. This is because your loan is secured against your property. So, the risk is reduced from the lender's point of view. If you don’t maintain your loan repayments, they can repossess your home and sell your property to recover the funds owed. 

You can usually borrow larger amounts  

Lenders often lend larger amounts of money on secured loans compared to unsecured loans (such as personal loans). Again, this is because they see secured loans as less of a risk to themselves.  

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

You may be able to access lower interest rates 

Secured loans also tend to come with lower interest rates than unsecured loans, as your home is used as security. This may reduce the cost of borrowing.  

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. This could make your repayments more affordable each month. Also, consolidating your debts means you only have one monthly repayment to deal with. 

You can use your repayments to build up your credit score 

If you make 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’ll be worth it in the long run, and you should find it easier to access credit in the future. 

Disadvantages of secured loans

Borrowing more than you need could lead to financial difficulty 

Secured loans start from £10,000 with Ocean, but make sure to only borrow what you can afford to pay back. Don’t be tempted to take on a bigger loan than you need, or you may risk getting into financial difficulty. 

You could pay more interest overall if you spread payments 

You can usually spread your repayments 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. 

It's also worth remembering that the lowest interest rates tend to be reserved for those with the highest credit scores. 

Find out how you can improve your credit score. 

Your credit score can be damaged if you cannot maintain repayments or you make multiple applications

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. If you make too many applications within a short time period, this could put some lenders off. 

Tip: Before you apply, it’s best to use an eligibility checker to find out the likelihood of you being accepted. This only involves a soft search of your credit file, so it won’t impact your score. 

It's important to make sure the loan is affordable for you, before you take it out. If you miss any payments or pay late, 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. 

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

Your house could be at risk of being repossessed if you don’t make your repayments on time, every time. It’s important to make sure you can afford the repayments every month for the full duration of your loan. Remember to consider potential emergencies, such as car repairs for example, when working out what you can afford. 

Early repayment charges may apply 

If you decide to pay off your loan early, some (but not all) lenders may charge an early repayment fee. When you take out a loan, the lender should make you aware of any early repayment charges. 

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Secured loans are secured against your property.