While mortgages may be familiar and well understood by most people, secured loans are often misunderstood. This can lead to paying more than necessary to obtain a loan and end up causing financial hardship for borrowers.
With that in mind, we’ve put together some tips for homeowners who need a loan.
Let’s start by breaking down the basics.
What is a secured loan?
A secured loan, also known as a homeowner’s loan, is a type of loan secured by the equity held in your property. By offering the lender a security on your property, you will increase your chances of acceptance and generally get a lower interest rate than offered on unsecured loans.
They are extremely popular among homeowners looking to raise money to consolidate debt, make improvements to their property or buy a new car.
Who can withdraw one?
Secured loans can be taken out by almost anyone – as long as they are homeowners. Lenders typically limit borrowing through affordability rules and loan-to-value (LTV) restrictions, typically allowing borrowers to take up to 90% of their home’s value, less any outstanding mortgages.
5 key tips for those looking to take out a secured loan
- Do not pay high brokerage fees – Most secured loans are arranged through brokers and can come with high brokerage fees. Some brokers such as Fluent Money and Ocean Finance may charge fees ranging from 10-12.5% of your loan amount, which significantly increases the cost of setting up a loan. Look for a broker that charges lower fees, like ABC Financewhich charge a flat fee of £995 and you could save thousands of dollars.
- Always consider affordability – Before taking out a loan, it is important that you consider affordability, especially in a rising interest rate environment like the one we find ourselves in now. To do this, consider not only the current cost of repaying the loan, but also your stressed repayments. . Stressed repayments are the monthly cost of the loan if interest rates increase by a certain amount.
- Can you improve your credit score – Improving your credit score could help you get a better deal on your secured loan. Although your credit score usually builds up over a long period of time, there are things you can do to increase it quickly. This includes getting registered to vote and removing any faults and CCJs you have.
- Is a secured loan the best option – Before taking out a secured loan, consider alternatives, such as mortgages and unsecured loans. Although an unsecured loan generally has higher interest rates, it also has lower fees and shorter terms. So the loan may cost you less overall, even if your monthly repayments are higher. Likewise, by considering a mortgage rather than a secured loan, you will have access to more products and may be able to get a better deal.
- Always get more than one quote – Shopping around will give you the best chance of getting a great deal. By getting quotes from more than one broker, you’ll have a better chance of lowering your interest rate by encouraging competition for your business. Even if the first quote you get is great, it’s always best to test the market by getting another quote.