What is a Secured Loan?

What is a Secured Loan - RateWise
by ratewise

Generally, the different forms of loans are divided into two categories, namely secured loans, and unsecured loans. A smart borrower must know about the available loan options.

Applying for a loan depends on various factors, and each of them could help you find a cheap interest rate. Let us discuss this in detail. 

All you Need to Know About a Secured Loan

A secured loan is a cash loan that is backed with an asset you own. This valuable asset is known as collateral or a guarantee. Some examples of collateral include a car, jewelry, or property.

The lender will hold the deed or title to the collateral until a borrower pays off the loan. When a borrower is unable to pay the loan back, the lender takes possession of the property or asset, sells it and gets the money back.

Secured loans are for buying specific items, and the borrowing limit of secured loans is high and could have lower interest rates than unsecured loans. A secured loan has set a maximum LTV percentage, which is the loan to value ratio.

Examples of Secured Loans

There are different examples of secured loans:

Vehicle finance

A vehicle finance loan is secured against the vehicle, and a borrower can own the vehicle once the loan is paid off.

Mortgage

A purchased property secures a mortgage loan. In this loan, the lender can sell the property if a borrower is unable to pay. The monthly payment for a mortgage includes a principal amount, interest, insurance, and taxes.  Homes are significant purchases, and thus, mortgages last for nearly 15 to 30 years.

Home Equity Loan

In the home equity line of credit, home equity can be used as collateral.    

Pawnbroker Loans

These are short-term loans with higher interest rates than bank loans but lower than a payday lender.

Title Loans

In this loan, the paid-off vehicles are used as collateral. The vehicle should be in good condition and operational to qualify for a title loan. The vehicle should also have full-coverage insurance.

LTV Ratio

Loan to value (LTV) ratio is the loan amount as compared to the property value, and it is expressed in the form of a percentage. Suppose you own a property worth £200,000, and the maximum LTV is 75%, then the borrowing amount would be £150,000.

It sets an upper limit, and you can borrow according to your credit record and what you can afford.

Pros of secured loans

Low interest rates

Secured loans have lower interest rates than guarantor or payday loans.

No perfect credit rating required

If a borrower has a less than perfect credit rating then secured loans are the suitable choice. But a secured loan is backed by an asset; the lender may look at riskier borrowers.

However, the worse your credit rating, the higher your interest rate will be. If a borrower has poor credit, then they will not get the secured loan.

Long period for loan repayment

Secured loans can last for more than ten years. So a borrower will get plenty of time to pay off the debt. However, the disadvantage is that the longer you take to repay the loan, the more interest you need to pay.

Cons of secured loans

Consolidation of other loans can increase debt

Most often, secured loans are marketed as a solution to debt problems. A person having too many loans can get a secured loan with low interest only when they pay off all the existing debts.

But this can lead to danger because instead of paying debt, a person can be tempted to spend money instead of paying existing debts making the situation worse.

A borrower can lose assets

It can be a big problem when a borrower misses a loan payment. In this case, the borrower can end up losing their asset.

Variable Rates

Secured loans have a variable rate that is riskier if the interest rate jumps in the upcoming years.

Asset value must be the same or exceed the loan amount

The lender secures the asset, which is of the same amount, or exceeds the loan amount so that it is recoverable if a borrower is unable to pay the loan.

Tedious paperwork 

A lot of paperwork is required when it comes to secured loans. The documents of ownership for the asset and tons of verification take place. The process is tedious and time-consuming.

Final Words

Every loan comes with its advantages and disadvantages. You must choose the one that can satisfy your monetary requirement without giving you much hassle. Focus on every detail before applying for a loan to prevent future troubles.

Need some extra cash to get started?

Whatever term suits your budget, RateWise can match you with a local broker that knows how to help—regardless of your credit score! Get pre-approved for up to £10,000 today!

What is the easiest place to get a personal loan?

Ratewise is the easiest place to get a personal loan because we help you search the market and find the best certified lender for you.

How many personal loans can you have UK?

How many personal loans can you have in the UK? That depends on your financial situation. You are certainly able to take out more than one loan if you have the financial ability to.

If you are borrowing through the same lender however, it may be simpler to consolidate your payments to make sure you don’t miss any.

What is the easiest loan to get?

The easiest loan to get is a secured loan. This is because a secured loan comes with the condition that you put some of your property up as collateral during the loan period.

What is the minimum credit score for a personal loan?

The minimum credit score for a personal loan is dependent on your lender. With Ratewise we find you a certified lender who can work with your situation and help you build your credit score if it isn’t quite high enough to get your desired loan. 

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Categories: Personal Finance