A guide to secured personal loans

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When taking out a general loan to buy a car, or finance some other venture, consumers are often asked whether or not they want to take out a secured loan. This decision is one that will have an impact on the borrower’s monthly finances for years after and, therefore, it is crucial that they make the right choice.

Secured loans

A secured loan is, as the name suggests, taken out on the proviso that the borrower can offer some kind of surety against their debt.

Usually this means that the borrower will secure the loan against their home, or some other tangible asset of high-worth.

This gives the lender the security that, should the borrow default on their payments or hit hard financial times, they have a way of recouping the funds leant.

According to Credit Action, at the end of January 2008 total secured loans against homes stood at £1,187 billion, which is a 9.7 per cent increase compared with the same month in 2007, indicating the popularity of this kind of loan in the current environment.

Borrowers repay their debt on a monthly basis, usually over a ten to 25-year-period, depending on how much was borrowed.

Pros

The reason people take the plunge and put their property on the line is that by doing so they can secure a lower rate of interest on the loan.

In the current climate, this may be a substantial advantage .

Furthermore, when taking out a loan against assets it is easier to wield a larger amount of money from the lender, as the bank sees this kind of borrower as a safer bet.

Cons

Should the borrower’s financial circumstances take a turn for the worse then they could find themselves up the creek without a paddle…or a home.

In the first instance of non-payment, the borrower may incur a penalty from the bank.

If non-payment continues then the bank will most-likely remind the borrower that their home will be at risk if they fail to keep up with repayments.

Should the borrower be unable to continue with the repayment then their home, or whatever asset the loan was secured against, will be acquired by the lender.

On the other hand, should the borrower’s finances improve they may find that repaying their loan in full before the agreed term is up will cost them dear.

Banks do not like customers paying off their debts too soon – it loses them money.

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