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Secured Financing – the right move for you?

28th July 2022

By Karina Nowicka

Is Secured Financing Right for You?

There are plenty of things to take into consideration before applying for secured financing since they come with numerous risks. Secured financing is usually another way to describe a secured loan or a mortgage. Secured loans are for borrowing larger sums. You must make sure that the money you are borrowing is necessary and with a sensible purpose. 

A secured loan is a loan or finance that is secured against an asset of value. This could be securing a mortgage against a home, or using an item you already own to secure finance. In some cases, you could use an expensive item for collateral, such as a car, plant, machinery, artwork or jewellery. The important thing to remember is that whichever asset you use as collateral it will be at risk until you have repaid the loan. This means the lender could claim the asset to repay the loan if you don’t keep up with repayments.

If for example, you only needed a small loan for a car repair, then a personal loan might be a better option. These can also be used for minor home improvements or maybe even a holiday. Personal loans, which is just another name for unsecured loans, are perfect for borrowing smaller amounts of money. They also don’t require an asset to be secured against the loan. They are typically paid off quicker, however you may not qualify without a perfect credit rating.

So how will I know which loan is best for me? 

There are multiple factors that this might depend on. Sometimes it is not your decision to make since not everyone will qualify. When securing a loan against assets such as plant, machinery, cars and jewellery in order to raise cash, it’s not likely to be the most competitive. These types of asset loans are usually used to fund a purchase. However, when using them to raise an additional loan there are fewer lenders which leads to less competition and higher rates.

Securing a loan on property?

When you own a house or an investment property, a capital raising loan is far more common and the security is better. Consequently, there are quite few reasons why it might be a good choice: 

  • You may be able to borrow a larger sum. Secured loans and remortgages let you borrow much more than personal, or otherwise known, unsecured loans. 
  • Reasonably low interest rates. Typically, secured loans often have much lower interest rates than unsecured loans. This is due to them being a lower risk for lenders. 
  • Perfect credit score is not necessarily needed. It’s usually a lot easier to get accepted for a secured loan or remortgage than an unsecured loan. Especially if you have a poor credit rating. Again, this is because you are putting down an significant and immoveable asset as collateral, which makes you a smaller risk to lenders.
  • More time to repay. Unlike unsecured loans, a secured loan allows you to pay off your loan over a much longer period of time. Most secured loans can give you up to 25 years to pay them back in full. This means your monthly repayments will be smaller overall. This does however, also mean that the longer you stretch your term of repayment, the greater the total cost of the loan could be. This is because the cost of the extra interest generated could be more than the lower rate would save you. This is where you need advice to compare the pro’s and con’s

What to consider

When planning on applying for a secured loan or a remortgage, you want to have a look around online for some good deals. However, these best buy tables will only tell you headline rates. Not the best loan you qualify for. The same applies if you apply to a single lender. Their headline rate may be great but if you don’t get it you are ignoring 99% of the rest of the market. Therefore you could easily pay far more. A decent broker will compare the whole market for you and advise what is suitable and most cost effective for your circumstances.

Not to be entered into lightly

If you don’t keep up the repayments on a secured loan or mortgage the asset being offered as collateral could be at risk of being repossessed.

Your financial situation 

You need to think very carefully about what you can afford to pay back. Ask yourself questions such as do you really need whatever it is that you are taking out a loan for? It’s a huge responsibility and you must be fully committed to paying it off. An adviser will not just check you can afford it now but will consider what happens if interest rates increase or their are planned changes to your circumstances.

Your loan-to-value ratio

When you apply for a secured loan with your lender, one of the first things they will do in your checks is look at how much equity you have in your property. In essence, this is the difference between the value of your home and how much you owe on the mortgage plus any secured loan. These important figures tell the lender roughly how much money they could recuperate from selling your home upon repayment failure. In summary, the more equity you have in your property, the more money you might be able to borrow.

Interest rates

The majority of secured loans have a choice or fixed or variable interest rates and you should be ready for the possible rate rises. Another thing to consider is to do some comparison of secured loans from different lenders; look at the interest rates, additional fees etc. That way you can get a better idea of what you can roughly take out and what you will be paying back. The rate you might be offered usually depends on the amount you want to borrow, how long for, how good your credit score is and lastly, the worth of your collateral.

Still unsure which loan suits you best?

Before you agree to any loan, it is vital to ensure that the secured or unsecured loan is right for you. If you are still unsure and would like some independent advice on secured loans or mortgages, reach out to us here at Promise Money. One of our advisors will be happy to guide you in the right direction. For unsecured loans check out our loan finder which will give you information to help your decisions and guide you to lenders available.

Talk to a Promise Money adviser for more details

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