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How Do Secured Loans Work?
What does it mean when a loan is secured on your property?
A secured loan is when you use your property to borrow money. Your property acts as 'security' or collateral on the loan amount you are borrowing, very much like a mortgage.
Secured loans are often referred to as a second charge; this is because you are borrowing money on top of your existing mortgage, making it a secondary charge to your property.
Because secured loans utilise the amount of money (or equity) available in your property, like a mortgage, they will be repaid when you sell your house, or some lenders will let you move your secured loan to your new house.
It is important to remember, that like a mortgage, if you fail to keep up your secured loan repayments your home is at risk from repossession. It is always best to let your secured loan lender know if you are having trouble making the repayments; they will want to help you.
How much money will a secured loan allow you to borrow?
A secured loan allows you to borrow the money that is available in your property; this is often called the equity in your property.
The equity in your property is easily calculated; you simply take your property's current market value and then minus your outstanding mortgage and any other secured loan you may have on your property.
The amount leftover is how much equity you have, or in other words, how much money you can borrow with a secured loan.
Don't worry if your calculation is less than you need to borrow, there are many secured loans available for people who have little or no equity in their property, these secured loans allow you to borrow up to 125% of your property's value.
How much can you afford to borrow with a secured loan?
When working out how much money you can feasibly borrow with a secured loan it is also important to know how much you can afford to repay.
Secured loans do allow you to spread your repayments over much longer periods than their unsecured counterparts. Usually the longest repayment term for a secured loan is 25 years, however there are secured loan lenders that may allow you to repay your secured loan over 30 years.
Longer repayment periods will make monthly loan repayments much more affordable and allow you to borrow more money.
You can use our loan calculator to work out what your monthly repayments will be on the amount of money you need to borrow. You will need to input an interest rate into the calculator because different secured loan lenders charge varying rates of interest. However, if you look at our secured loan comparison page, you will be able to see the different typical APR's on offer for use in our loan calculator.
Remember though, the typical APR is the rate that most people are offered (at least two thirds of applicants) and the actual rate you are offered may be higher or lower depending upon your personal and financial circumstances.
What are the different secured loan repayment and interest options?
Secured loans can be borrowed over a period of up to 25 years (occasionally up to 30 years). The deciding factors in your loan term will be how much you are looking to borrow and how much you can afford to repay each month.
Obviously, it's always beneficial to repay your secured loan as quickly as possible, however it’s also important that your secured loan repayments are affordable.
Depending upon the secured loan you choose, you may be able to defer your loan repayments for up to 6 months at the start of your loan. Having the option to defer your loan repayments may be a worthwhile consideration when choosing a secured loan if you want a little breathing space between getting the finance you need and beginning to repay your loan.
Most secured loans offer variable interest rates, which means that the rate of interest you are charge will fluctuate inline with the Bank of England's base rate. Having a variable rate loan means that your monthly loan repayments can go up as well as down.
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