Your home is your security, and when you apply for a secured loan, it’s also the bank’s security. They know where you live, and they know you aren’t going to risk losing your home over a few missed payments. Because of this, they’re more than willing to lend money to those who have less than perfect credit, and they’ll usually extend very good interest rates and repayment terms.
However, this does not mean banks aren’t careful, because they are. They will check your information with the credit reporting agencies, and they will review any existing loans, credit card debts, and other outstanding lines of credit you may have. They will also consider your overall financial health, and how you are managing your finances. This means it’s important for you to consider these things before you start shopping for the best rates on a loan secured with your home. Read the answers to these seven questions asked by our readers to learn more about secured loans and what you need to get one:
1) Why get a secured loan?
Many people might wonder why it’s a better idea to get a secured loan instead of a traditional unsecured loan. Aside from the fact that the credit crunch has made High Street unsecured loans nearly impossible to get for most people, interest rates and repayment terms also need to be considered. Interest rates are higher across the board for unsecured loans, and repayment terms are much shorter than those for loans secured with your home. Plus, secured loans are available to a much wider range of credit scores than unsecured loans. People with less than perfect credit, or those who are trying to fix problems, like paying off high interest credit card loans, can make use of a secured loan to get their finances in order.
2) What do you need in order to get a secured loan?
To start with, you’ll need to establish your income, provide details on the property you’ll be using as a security for the loan, and provide personal information, including your full name, date of birth, and last three years of addresses. Note that you’ll also want to have your ID, pay stubs, bank statements, and ideally a home appraisal or existing mortgage detail too. This will let the lender consider the value of your home against what you currently owe on it.
3) How long does it take to get approved for a secured loan?
Most of the time you can get a basic yes or no decision the same day you apply. In this case, the lender will tell you if they believe you meet their loan criteria, and will extend a loan offer to you. There is no obligation for you to accept their loan offer or terms, and you can still negotiate the loan value, interest rates, or other items before agreeing. Once you agree, the loan offer will be processed, which usually takes a couple weeks to finish. Depending on your relationship with the lender, it can be significantly less, especially if you’re working with your existing lender and primary bank.
4) How much will you be able to borrow?
You can borrow as little as £3,000, and as much as £500,000, depending on the value of your home, and the available equity you’ll be borrowing against. Note that some lenders will require larger minimums, such as £5,000 or even £25,000, while others will not be willing to offer as much, instead limiting maximum loan amounts to £200,000 or less. The amount is entirely dependent on the value of your security, income, outstanding debts, and policies of the lender. These factors will also determine your ability to pay back the loan, and as such are considered by the lender in deciding what you’ll be able to borrow and repay.
5) What happens if you don’t repay a secured loan?
In the event you are unable to repay your secured loan, which is a rare occurrence in the UK, you can lose the home. If this happens, your home will be foreclosed on, which will result in it being sold to repay any outstanding loan amounts. After your loans have been repaid, anything left over will be returned to you, but not before legal fees and processing charges are deducted.
6) What actually happens in a secured loan home foreclosure?
The lender or lenders will sell your home, and any outstanding loans against your home will need to be satisfied. This includes all associated fees and penalties. Once your home is sold and your debts to the lenders are satisfied, you will receive any leftover money. For example, a £500,000 value home, with an existing mortgage of £250,000, and a secured loan of £50,000 will have approximately £200,000 of remaining possible equity. That means you could get up to £200,000 from a sale, less fees and legal costs deducted by the lenders. However, if the market turns down, or your home sits for an unreasonably long period of time without being sold, your lenders can accept any reasonable offer that satisfies the debt and is considered a ‘fair market’ value. In some cases this can mean you’ll still owe the lenders money.
7) Are there any other alternatives to a secured loan?
There are a number of alternatives to a secured loan, but they are all lower value loans, with much higher repayment terms. For example, you could arrange a Guarantor Loan through a friend, but the maximum loan value is £5,000, and you need to pay it off in five years. That £5,000 loan would cost you a total of about £15,800 to repay. For the same money and repayment scheme, you could get a secured loan of £14,000, and save £9,000 pounds. So, while there are alternatives, none of them are even comparable to a secured loan.
Borrowing against your home is a big decision, but managed properly, it can allow you to remodel, pay down higher interest loans, or add an addition to your home. Just consider the process, and how you’ll protect your home in the event any of your current financial circumstances change, and you should be fine.