A Guide To Secured Loans
Secured loans, also known as second charge or second mortgages, are loans offered to homeowners with bad credit looking to borrow a substantial amount of money. Such loans are secured against the borrower’s home, allowing them to get funding even with impaired credit rating.
These kinds of loans have gained a lot of popularity over the past few years as more people learn the advantages.
Getting unsecured loans funded with bad credit is challenging and the interest rates are often high. With secured loans, the lender exposes themselves to less risk and therefore offers low interest rates.
Why Apply for Secured Loan?
People suffer bad credit ratings when they are unable to make credit cards payments on time, default loan payments or file for bankruptcy. This reflects on the borrower’s credit reports. Your credit report is what lenders use to determine whether you qualify for a secured loan, and how much you should pay in interest rates. Those with bad credit often get declined or end up paying more interest. Homeowners with bad credit can apply for home improvement loans, car loans, debt consolidation loans, bridging loans, guarantor loans, long term – as well as short term loans.
What Options are Available?
Second charge loans vary based on many factors such as; your property’s equity value, credit rating and lender terms and conditions. Some lenders will offer loans of sums up to £25,000 while others offer larger sums, sometimes amounting to hundreds of thousands.
Secured loans should not be confused with mortgages. When applying for your first mortgage, you’ll be asked to put down a deposit. With secured loans, you’ll often be required to have a certain amount of equity to your property. Equity is the difference between your property’s value and the outstanding mortgage balance.
Do I need to Pay my Mortgage in Full?
The good thing about secured loans is the fact that you don’t need to pay your first mortgage in full to qualify. This is mainly because the loan isn’t based on your home’s total value but the equity. With equity loans, you’ll only be allowed to borrow amounts equal to the equity you’ve built up. If the amount borrowed exceeds your home’s equity value, then you’ll be borrowing against your home’s total value which has already been tied to the first charge.
Do Interest Rates Vary?
Yes. Interest rates vary as you move from one lender to the next. Experts advise that you take some time to look around before settling for any lenders.
How do I find the Best Secured Loan?
The best way to find secured loans is to shop around and get quotes from different lenders. Compare quotes between finance companies, banks, mortgage lenders and online lenders before settling.
What are the Risks Involved?
While both the lender and borrower take various measures of risks, the homeowner stands to lose more. A homeowner stands to lose their home if they are unable to make payments while the lender risks the possibility that the borrower won’t live up to the agreement to pay on time. However, if you have poor credit, then this is probably the best option you have.
What else you Need to Know
Interest rates – Lenders will often advertise these loans as annual percentage rate (APR) or representative annual percentage rate. APR refers to the interest paid yearly while representative APR refers to both the annual interest paid combined with the fees involved. Before settling for a lender it is advised that you first understand these terms.
LTV ratio – There are scenarios where borrowers are not able to borrow full amounts of their properties’ equity. The portion they can borrow is referred to as loan-to-value. For instance, a 70% LTV means that one can only borrow up to 70% of their home’s equity.
Loan terms – This refers to the duration you are required to pay the loan. Longer terms will have you paying less per month but with higher interest rates. If choose shorter terms, you’ll be paying more per month but with less interest.
Without second charge loans, the only shot you’d have to apply for bad credit loans would be payday loans and doorstep loans. But with these options, you’d only receive a small amount of money which will only be good for small tasks.