The Case For Secured Loans

This week in "Let's Talk About Money" we've looked at re-mortgaging and investing via index trackers. Now we're going to take a look at the positive case for secured loans and when they can be useful.

We've written many critical articles about secured loans over the years at The Fool and rightly so. They're sometimes marketed in an unethical manner and need to be handled with care. However, in the right circumstances, and for the right people, they can be useful....

What are secured loans?

Strictly speaking, they're loans which are secured against any asset. But, in normal usage, they're loans secured against a home, normally on top of a mortgage. They're sometimes known as `homeowner loans' or `second mortgages.'

Secured loans - the advantages

Large loan size - many providers offer secured loans up to £75,000 with some going to £100,000. The limit for unsecured personal loans is normally £25,000.

Longer payment periods - as secured loans are similar to mortgages you can borrow for longer periods than for a personal loan.

Attractive APRs - with the security of a home on the table, some lenders are willing to offer interest  rates of 7% or less to some borrowers.

No set up fees - unlike mortgages there are usually no set up fees, however this is not always true with brokered loans.

Poor credit history - if you have a poor credit history and struggle to get an unsecured loan, or a rate that is reasonable, a secured loan might be the answer. Banks will be happier to lend to you because they have the security of your home.

What are the downsides?

Home at risk - Taking out a secured loan puts your home at risk. If you can't meet your repayments, your lender may force a sale of your home. This is a really important point. Be careful!

Not a debt solution - secured loans are often marketed as a way to deal with debt problems. The pitch is this: if you're carrying a heavy debt burden, you can consolidate your repayments into one manageable monthly payment and your life supposedly becomes easier.

This is fine in theory. The problem is that too many borrowers take out the loan and then carry on spending too much. As a result, the borrowers end up further in the debt mire. Our research suggests that secured loans normally make debt problems worse not better.

If you have serious debt problems, there are better solutions. Visit our Get Out Of Debt centre to find out more.

Variable rates - most secured loans have variable rates whereas personal loans tend to have fixed rates. So you could get caught out if interest rates rise significantly.

Longer payment periods - Yes, you're right, we said that longer payment periods were an advantage, and they are if you want to spread our repayments. There is a downside though, you end up paying a higher total interest figure.

So when should you use a secure loan?

I think secured loans are a useful tool for people who wish to borrow prudently against their home. One example would be if you wanted to improve your home. Or if you wanted to buy another "big ticket" item.

If you're interested in finding out more, visit our loans centre and get a quote for a secured loan now.