Secured loans explained
Secured loans or second charges are they are sometimes called are normally available to those borrowers who have a mortgage already and who wish to raise extra capital (typically between 5 to 100 thousand pounds) over a term ranging from 5 to 25 years.
They are often used to raise money for home improvements and to consolidate other credit into a single loan.
Often a secured loan may be relevant where your existing mortgage is tied in for some time making a remortgage a costly option or where the loan amount, term and affordability assessment make a secured loan a more cost effective option.
When a loan is secured against a property the title deeds are usually taken in receipt by the lender as further protection of their legal mortgage and this first charge over the property is normally known as a mortgage.
Secured loans are in fact mortgages usually taken as a second, third or subsequent charge against the property and without the receipt of title deeds.
This order of legal charges reflects the lenders position in law in terms of the right to proceeds of the sale of the property to repay the loan should it go into default.
So the first charge holder would receive all proceeds of the sale with any remainder after the first charge and lenders costs were repaid going to the second or third charge holders and so on before any remainder went to the property owner.
For this reason secured loans are normally only intended for those who already have a mortgage on a property, as most high street mortgage lenders will lend very small sums (as little as five thousand) on a mortgage.
They are also higher risk and this will usually be reflected in the interest rates available.
It's important that anyone arranging a secured loan consider firstly whether they are happy to secure the debt against a property and whether this is necessary when compared to unsecured loans for example.
It is also important to check whether it would be better to arrange the finance as part of a remortgage. We will help you to decide the best course of action for your circumstances and take things from there.
The Pros and Cons of Secured loans
- less stringent credit and income requirements than mortgages
- smaller loan sizes and terms may be offered
- lower early repayment charges may be offered
- risk securing extra debt against a property and reducing equity
- higher interest rates in most cases
- staggered early repayment charge may impede remortgaging in the future
- possible extra costs of a postponement of second charge at remortgage