Secured Loans - A Beginners Guide » Advanced Debt Management Solutions

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Secured Loans - A Beginners Guide

Friday, May 29th, 2009 Subscribe To Our Feed

Secured loans are a type of loan that is secured against something valuable, such as a property. Secured loans can be a less risky kind of loan from the perspective of a lender because they are secured against something of value, and you will often find you can borrow more money this way. It also means they could come with lower interest rates than other loans.

Safe as houses?

So, what does it mean when a loan is ’secured against your property’? The agreement means the lender could (potentially) force the sale of your property if you fail to keep up with the loan repayments. However, this doesn’t mean you will lose your home if you miss one payment. Like any other debt, if you fail to make the repayments you should start by talking about the problem with your loan provider - working together, you may be able to find a realistic way for you to pay back what you owe.

If you’re thinking about taking out a secured loan, you’ll need to understand how equity is involved.

Equity

Equity is the portion of the value of the property that you don’t have any debt (in the form of a mortgage/loan) secured against. The amount of equity you own will play a part in determining how much money you can borrow.

For example, if your house is worth £150,000 and you currently have a £50,000 mortgage, it means you have £100,000 of equity. So you could, in theory, apply for a loan of up to £100,000 against that equity.

However, this isn’t the only factor. As with any type of credit, you should make sure that you can afford your loan repayments before taking out a secured loan - without affecting your ability to keep on repaying your mortgage (and any other outstanding debts).

If you borrow against your property, then you are reducing your equity, and this is particularly dangerous at a time like now when house prices are falling. You may end up owing more on your home than it is worth, which means you will be in ‘negative equity’.

This is something else lenders take into account when considering secured loans - the probable future value of the property.

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