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Secured Loans to Consolidate Expensive Debts
If you have credit card balances and loans on higher rates then you may be better off using a secured loan to consolidate everything. Most lenders will let you pay extra each month or year with no penalty so you are in control of how long the loan is outstanding.
What is a secured loan?
A secured loan, or homeowner loan, is a large loan only available to homeowners. The loan is secured on your property hance the name ‘secured loans’. This is similar to a mortgage and means your home may be repossessed if you cannot make the repayments. However, it also means the interest rates will be quite competitive compared to an unsecured loan.
How much can I borrow with a secured loan and for how long?
What can I use a secured loan for?
A secured loan can be used for almost anything. Most people use secured loans to make home improvements or to consolidate debt. They can also pay for things such as a new car, an exotic holiday or a dream wedding.
Why would I choose a secured loan?
What is debt consolidation?
Many secured loans are taken out to consolidate debt. This means taking out a single large secured loan to repay multiple smaller, pre-existing debts. This way you pay off the debt with a single, simple, monthly repayment. By paying off high-interest debt (like credit card debt), with a low-interest loan (like a homeowner loan), you can save money over the long term.
What should I consider when choosing a secured loan?
You should consider your:
- How long will you need to spread the repayments over?
- Current equity. How much money will you be able to borrow?
- Credit history. What interest rates will you be offered?
- Existing debts. What else will you need to repay?
- Some lenders have eligibility criteria that you will have to meet. For example, being a UK resident for at least 3 years or being within a certain age range.
Secondly, you should consider what type of secured loan you want:
- Short-term fixed rate secured loan. The interest rate is fixed for a predefined period, typically a few years, so you will always know how much you will have to pay each month. Once the fixed rate term ends you will be automatically transferred to a variable rate loan.
- Fixed for term secured loan. Similar to the short-term loan, except this loan’s interest rates are fixed for the entire term of the loan.
- Variable rate loan. The interest rate may fluctuate depending on the state of the market, the choices of the lender, and the Bank of England base rate. Because the interest rate isn’t fixed, it may appear lower when you apply. But it can increase, and it most likely will.
Alternatives to secured loans
Perhaps a secured loan isn’t the right loan for you. Here are some possible alternatives:
- Unsecured loan. You might be able to find an unsecured loan with a good interest rate to suit your needs. It’s unlikely you’ll be able to borrow as much as with a secured loan, but there’s no possibility of repossession.
- This can free up a lot of cash if you have a lot of equity. However, you will probably be paying interest for a longer period of time. It may not be the best option if you’re already satisfied with your current mortgage deal.
- Equity release. This option is only available if you are over 55. With equity release a lump sum is paid by the lender who, in return, takes possession of a percentage of your home, and get their money back when your house is sold or when you die.