If someone finds themselves short of cash, but they own some other asset – such as a house or car – they can use that asset as collateral to get a secured loan. The lending company will usually offer certain amounts in relation to what they consider to be the value of the collateral.
How do secured loans work and whom are they best suited to?
It’s a fairly simple concept, if money is tied up in a house or other property of some kind, its value can be set against a loan, in order for the borrower to secure cash. Homeowners in particular are frequent customers of companies who offer secured online loans, simply because they have a large amount of collateral, but may be struggling with other monetary problems, such as unpaid bills, council tax, sick leave from work, etc. It’s no good having the value of a home over your head, if you’ve got no money to feed yourself with, and although – as with all kinds of loans – there is the risk of losing the asset if repayments are not made, it can sometimes be beneficial to release some of the equity in a building, to allow for a certain amount of breathing space financially. People with bad credit ratings or CCJ’s could also profit from a secured loan, if they own a house or car, it’s just a question of having something of value to secure the money against.
The advantages of secured loans
Obviously it’s an advantage to be able to continue living in your home whilst benefiting from some of it’s equity, and thanks to the internet giving rise to thousands more companies willing to offer loans of varying amounts, there are good reasons to take out a secured loan. Online services make it so much quicker and easier to secure a loan, allowing the borrower to make payments from their bank account sometimes within the day. Although there are plenty of companies who will try to extract ridiculous interest rates from applicants, because of the nature of the market, there are so many competitive deals to be had – it pays to shop around a little, if you have the time. Furthermore, for borrowers who have a less than spotless credit history, it’s not a problem with secured loans – as long as they have something to use as collateral. This opens the door for many more people having financial problems, and gives them another option besides bankruptcy.
The disadvantages of secured loans
The first con that should enter any prospective borrowers minds is the interest rates applied to secured loans. Because this type of loan uses property value as collateral, the amounts are much higher than say a payday loan, sometimes reaching into the hundreds of thousands. This means that they’re spread out over a much longer period, and can swell enormously before they’re even close to being paid off. The biggest negative however, is the risk that arises when a loan is secured against a home or valued property, as soon as the money is transferred; the asset is immediately under threat of foreclosure if the owner does not keep up with the payments. This is something that all homeowners should consider before taking on a long-term loan of this kind.