What are the Features and Benefits of a Secured Loan?

Alex Parsons Alex Parsons | Secured Loan Expert

As of July 2014, the Bank of England estimated that UK consumers had a combined total of more than £17 billion in secured debt. That is a lot of money being used for many different purposes. What needs to be understood is that the vast majority of this debt involves either mortgages or secured loans; it is debt for which the lenders hold tangible property as security.

For the purposes of this discussion, we want to focus on the secured loan obtained by using the equity in one's property. It is the secured loan that allows the homeowner to raise tens of thousands of pounds that can be used for a variety of purposes. It is one of the best forms of consumer financing, for both borrower in the banker alike.

Secured Loan Features

A secured loan is very different from what is generally known in the financial world as consumer credit. A secured loan is obtained by offering tangible property as collateral, while unsecured consumer credit (for example, credit cards and personal loans) is obtained simply on the borrower's promise to repay the money. This is a huge difference.

Securing a loan with tangible property reduces the risk of the lender. This makes the lender more willing to loan money at lower rates and with better terms.

A second important feature of the secured loan is the fact that it is usually based on home equity. In other words, the borrower is using the equity his or her property already holds as a financing tool. The more equity one has, the more money he or she will be able to borrow. Equity then becomes almost like a personal line of credit that is always available.

Benefits of Secured Loans

The benefits of a secured loan are numerous. First, it is among the easiest forms of consumer financing to obtain ?? even for consumers with less-than-stellar credit. Offering a home as collateral goes a long way toward looking beyond bad credit from the lender's point of view. Part and parcel with this benefit is a second benefit of affordability.

Interest rates on secured loans tend to be substantially lower than unsecured credit. Again, it is the idea of offering your home as collateral that makes the difference. Lower interest rates make secured loans ideal vehicles for consolidating high interest debt into a single, more affordable payment.

Third, secured loans offer consumers a financing vehicle that can help them repair bad credit. It is true that bad credit may result in a slightly higher interest rate, but being faithful to make payments on time does a lot of good for a poor credit history. Moreover, with very manageable terms, borrowers can take decades to repay a secured loan if necessary. That does even more good for a person's credit history.

Finally, secured loans provide funding that is nearly limitless in what it can be used for. Let's say a homeowner wants to increase the resale value of his or her property through strategic renovations. A car loan cannot be used for that purpose, and credit cards do not provide enough money to do the job. A secured loan is the perfect financing tool for such renovations. Nevertheless, secured loans can also be used for debt consolidation, paying medical bills, starting a business, etc.

As you can see, secured loans have a lot to offer consumers. It is no wonder so many people are taking advantage of them in the modern era of consumer financing.

Sources:

Bank of England ?? http://www.bankofengland.co.uk/statistics/Documents/bankstats/current/taba5.3.xls

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