Secured Loans, Home Equity and HELOC: What You Need to Know
Consumer lending is something that has its own terminology and vocabulary lenders use to discuss what they do. It is advantageous to borrowers to know and understand the terminology to ensure they are always getting the most equitable deals they can truly afford. A case in point is that of lending against the equity in your home. Three terms you need to understand to protect yourself include secured loans, home equity, and HELOC.
These three terms define how you borrow against a piece of property. If you have a primary residence you want to borrow against, we can help you get started by defining the terms for you. Be sure you fully understand any loan product before you agree to borrow.
Secured Loans Defined
Secured loans are a specific form of credit that can be extended to both commercial and retail customers. The idea behind a secured loan is that the borrower offers something as collateral to protect the lender in the event of default.
For example, a commercial borrower might offer a piece of property or some sort of interest in the business as collateral. Your average consumer is more likely to offer the equity in his/her home. With a secured loan, the lender can repossess whatever property is offered as collateral and sell it to recover losses in a default situation.
Home Equity Defined
Home equity is one of the most confusing aspects of secured lending for consumers. The easiest way to define home equity is to explain it as the difference between what a consumer currently owes on his/her mortgage and the retail value of the property in question. Home equity fluctuates along with property prices.
For example, a homeowner may still owe Â£200,000 on a property currently worth Â£250,000. The difference between the two â?? Â£50,000 â?? is considered the equity in the home. Should property values continue to rise as that homeowner gradually pays down what is owed on the mortgage, equity increases. Equity can also decrease as property values go down.
Now that you are familiar with secured loans and home equity, it's time to talk about what is known as the home equity line of credit (HELOC). This form of credit can get a homeowner into trouble if he or she does not understand what it is. The first thing you need to know is that a true HELOC is not the same thing as a secured loan.
A secured loan offers a lump sum of cash that must be repaid, according to a set schedule, until the debt is entirely settled. The equity in one's property is used to secure that loan. A HELOC also uses equity as collateral, but it is a revolving line of credit rather than a single lump sum.
The best way to understand a HELOC is to think of it as a credit card. The lender makes a specific amount of credit available based on the equity in the borrower's home. The borrower can continue to spend on that credit line up to its limit, and make monthly payments against the balance. As long as the borrower does not reach that limit, he/she can continue spending against his/her line of credit. The trap of the HELOC is borrowing tens of thousands of pounds and never being able to pay back.
We hope you'll take the information we provided on secured loans, home equity, and HELOC and use it to make wise financial decisions. Be careful with HELOCs though â?? these can get you into a hole that you cannot dig yourself out of.
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