A secured loan, as the name suggests, is "secured" against an asset. In other words, secured against something of value such as a property, motor vehicle, etc. that a lender can take possession of and sell to recover any outstanding amount if a borrower defaults on the loan. The provision of security or "collateral" by a borrower means that he or she is less of a risk in the eyes of a lender, meaning that larger amounts can be borrowed at more competitive interest rates than is possible with an unsecured loan.
Secured Loan Considerations
If you are considering a secured loan, you should be aware that your home or other assets might be at risk if you cannot keep up the repayments on a loan secured against them. A secured loan offers security to a lender not a borrower insofar as a lender can forcibly take possession of and sell your assets if problems arise. This does not mean, of course, that your home can be repossessed if you miss a single monthly repayment. In the case of an unsecured loan, a lender has recourse to legal proceedings to recover any outstanding debt and those proceedings will inevitably examine your assets, including your home, in assessing your ability to pay. If you do find that you are experiencing difficulties in repaying a secured loan, contact the lender at the earliest possible opportunity, explain to them your situation and how you are doing to rectify it. The chances are that they will be more than happy to help you.
Secured loans are available from any number of sources. This includes traditional banks and building societies, specialist providers, who deal solely with secured loans and include those for borrowers with "impaired" credit histories, and brokers, who do not provide loans themselves, but act as intermediaries between lenders and borrowers. There are also several different ways of applying for secured loans, including written, online, applications forms, and the telephone. Whichever way you apply, and however quick the initial application process, you are legally entitled to a 7-day "cooling off" period when you can cancel a loan agreement and walk away with no further obligation.
Bear in mind, that the APR, or "Annual Percentage Rate", for your secured loan may not be the same as the advertised rate. The headline APR advertised is often a "typical" rate, that is, the rate available to at least 66% of applicants. If your credit rating is below average because of previous arrears, defaults, etc., you may not be eligible for this rate. The APR for your own loan may depend on your credit history, the amount of equity in your home, or the market value of the property minus any mortgage or other loans already secured against it, and your ability to repay the loan, in the eyes of the lender. If, for example, you have a mortgage of, £50,000, against a property valued at £100,000, you have equity of £100,000, and may be able to borrow up to that amount, depending on your credit history. It is more common, however, for amounts between £3,000 and £50,000 to be borrowed over terms of between 3 and 25 years. Legally, a lender must disclose the APR applicable to any loan, before a loan agreement is signed.
Lenders prefer secured loans to be taken out over longer terms, because this helps to offset arrangement fees and from the point of view of a borrower, a longer term means repayments can be reduced by spreading them over an extended period. However, this does mean that the total amount of interest repaid is increased substantially. Watch out for redemption penalties, which may be payable if you want to pay off a loan before the end of the original term. PPI, or "Payment Protection Insurance", which is intended to protect borrowers against unforeseen accident, illness, redundancy, etc. may affect their ability to make repayments. It is another money-spinner for lenders, and has often been knowingly mis-sold in the past. If you do decide that PPI is necessary, make sure that any policy really does cover all the eventualities and shop around for the most competitive deal. The PPI offered by a lender, along with the loan, is often hugely overpriced, and may not offer the cover you need, in any case.