Cole Harris
Secured loans are commonly used although many will regard them as a property owner’s last resort. They work because a secured loan will provide the lender with the security of a property in exchange for the loan.
There are pros cons of course with a secured loan. The benefits to a lender are that a loan may be available to a borrower who is unable to qualify for a loan via other methods due to a poor credit rating or CCJ’s. Secured loans may also be available for large amounts for example 75k compared with a smaller unsecured loan.
Disadvantages are that a secured loan can be expensive as often the loan period is longer than an unsecured loan sometimes up to 20 yrs. There is a cautionary note here, borrowing for a longer period may reduce monthly payments however the total amount of interest paid may be greater.
Example of loans of 10k @10% interest for a period of 5/10/15 years**:
5 years 212 pm Total paid 12,270 Total interest paid 2,720
10 years 132 pm Total paid 15,840 Total interest paid 5,840
15 years 96 pm Total paid 23,040 Total interest paid 13,040
** Source BBC finance page–May 2011
- A golden rule of borrowing is that you should not borrow money if you do not need to. Whilst this may seem common sense there are borrowers who take a loan for the wrong reason, for example to consolidate various loans or debts. This may end up with the total amount being greater than the total of the separate loans. If you have a good credit rating then a secured loan may not be the best option for you. Another golden rule is do not borrow more than you need, do not be tempted to increase a loan for spending you had not considered. Examples here include holidays, new cars or other luxuries. It should be stated that there are alternatives to secured loan. These include using savings, credit card balance transfers or even a topical idea these days – just reduce other spending instead!
