A secured loan, also known as a homeowner loan, are usually set against an asset. It uses your property as security against the amount you are looking to borrow. This can be an option if you need to borrow a large sum of money and have a poor credit rating. However, it’s important to understand the risks when opting for this type of loan… If you fail to keep up with the repayments, the lender could seize your property.
What’s the difference between a secured and unsecured loan?
An unsecured loan (or a personal loan) isn’t attached to your home or any other asset. Because there’s no collateral for lenders to claim if you can’t repay them, unsecured loans are typically considered the higher risk for lenders. So you generally need to have a good credit score to be approved for one. As this reassures lenders that you’re likely to pay them back.
Just as with a secured loan, when you take out an unsecured loan you’ll agree to certain terms for repayment, including an interest rate and how long you’ll have to pay back the debt.
Can secured loans help build credit?
The vast majority of financial products, including secured loans, can be used to build or repair your credit rating. It’s simply a case of ensuring you fulfil your responsibilities, make every payment on time and perhaps even overpay where possible. However, there may be more effective and sensible ways to improve your credit score than to take on additional debt.
What happens if I miss repayments on a secured loan?
In a worst-case scenario, missing repayments on your secured loan could lead to the repossession of your home. However, it is possible to speak to your lender if you feel that you might not be able to make repayments. As some will be willing to re-negotiate your situation and give you another chance.
Alternatives to a secured loan
Unsecured personal loans usually offer between £1,000 and £35,000 and is a popular alternative to secured loans. Not only does this option avoid putting your home at risk, but it may also come with lower interest rates.