When it comes to borrowing money, there are a few different types of loans available to you. Secured loans are one such option, and they can be a great way to get the funds you need with a great interest rate and acceptance levels, even if you have a low credit score.

But what exactly is a secured loan, and how do they work? In this article, we’ll take a closer look at what secured loans are and how you can go about getting one for yourself.

What is a Secured Loan?

A secured loan is a type of loan that requires you to put up some form of collateral in order to secure the funds. This collateral can be in the form of your home, your car, or any other valuable asset that you may have. The advantage of secured loans is that they typically come with lower interest rates than unsecured loans, making them a more affordable option in the long run.

If you have a low credit score, you may still be capable of getting a secured loan because the lenders have a confirmed way of ensuring they cover their losses in the event you fail to pay them back.

How Do Secured Loans Work?

According to Gary Hemming of ABC Finance, one of the leading secured loan brokers in the UK, secured loans work in much the same way as a mortgage. He added ‘just like a mortgage, secured loans allow you to borrow money against the equity in your property. They are then repaid through regular repayments, over a fixed term’.

He added that secured loans essentially ‘sit behind’ your current mortgage, with both your loan and mortgage running alongside each other.

What is a Secured Loan Used For?

Secured loans can be used for just about anything. Some people use them to consolidate their debt, while others use them to finance large purchases like a new car or home renovations.

You could pay for a wedding, a holiday, university or other educational fees, and so on. It’s really up to you how you choose to use the funds from your secured loan.

Are Secured Loans and Home Equity Loans the Same Thing?

No, secured loans and home equity loans are not the same things, although the two terms are commonly used interchangeably. A home equity loan is a loan that is taken out against the equity in your home.

Home equity is the difference between your home’s current market value and the outstanding balance on your mortgage. So, if your home is worth £200,000 and you still owe £100,000 on your mortgage, you have £100,000 in equity.

You can use this equity to take out a loan, and if you fail to keep up with payments, then the lender is legally able to start taking its losses from your home equity. For example, let’s say you took out a loan for £30,000 and didn’t pay any of it back.

The lender would be able to take you to court to cover their losses, taking £30,000 of your home equity, therefore owning a part of your property.

On the other hand, a secured loan extends to everything outside your home equity, although home equity is a form of secured loan in itself. You could use anything for your loan in a secured loan, including your car, savings, or even a piece of jewellery, like a watch.

The risks are still the same in that if you don’t make your payments, then the lender can take their losses from your collateral, but it doesn’t have to be your home equity specifically.

As you can see, there are many things to consider before taking out a secured loan. Make sure you do your research for the best deals and interest rates and understand the risks involved before signing on the dotted line.

If you’re looking for advice on whether or not a secured loan is the right choice for you, then be sure to speak with a financial advisor. They’ll be able to help you understand all your options and make the best decision for your individual circumstances. If you’re ever unsure you should proceed, then always make sure you get professional financial advice.

Never make rash decisions when it comes to taking out large loans when you’re unprepared!


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