- The collateral offered must be sufficiently valuable to cover the amount of the loan, so the assets offered by the borrower may need to be independently valued, depending on the exact circumstances and the amounts of money involved.
It is also possible to obtain a secured loan if somebody else, often a family member, is prepared to provide an acceptable form of collateral to secure the loan. Due to the fact that the financial institution has the legal right to liquidate the asset that you use to obtain your secured loan, in the event that you fail to keep up with the agreed payment schedule, the interest rate will be more attractive than that for an unsecured loan.
However, this has serious consequences for the borrower of a secured loan, if they are unable to keep up with payments. For instance, if you were to use your home as collateral for the loan, failure to make the loan repayments on time could lead to the forced sale of your property. It is far from certain that your assets would be sold for their true value, in the interests of settling the outstanding debt promptly.
Consequently, if you found yourself in difficulties in meeting the agreed payments for your secured loan, you should talk to the financial institute at once. It would normally be possible to arrange a solution agreeable to both parties. For those people in regular work, a secured loan can be an excellent way of generating the capital required to finance your project whether it be the purchase of a new car, a kitchen extension or a dream holiday. The cost of the loan is easily established as the APR (annual percentage rate or interest) is usually fixed. This means that the
cost of your project can be spread out over an extended period that is aligned with your monthly budget.
Most financial institutes will also offer you the possibility of buying an insurance policy with your loan that would ensure payments are made if you were unable to make them yourself through illness, injury or loss of employment. These policies do offer the borrower peace of mind, but, of course they come at a price!
A secured loan may be the best solution for some people, depending on their individual circumstances. Indeed, for the self-employed, those who have just joined the workforce, recently changed jobs or those with a patchy credit record they may be the only possibility. Like all other forms of borrowing, the interest charged for a secured loan will vary between banks and other financial institutions for essentially the same product (loan amount, term etc.) So, if you are interested in taking out a secured loan, it will probably pay you to shop around and compare deals. Don’t be afraid to ask the lender for a detailed breakdown of the costs and repayment terms so that you can easily compare offers between different banks or building societies.
Like any other form of borrowing, a secured loan needs to be repaid. The repayment period for a secured loan in the UK is also quite flexible ranging from six months up to twenty five years typically. For a given loan value, the longer the repayment period then the lower the monthly repayments will be. At first sight, it may be tempting to take the largest loan possible and pay it back over the longest term available, but, of course, interest will need to be paid over the whole lifetime of the loan and it mounts up!
If you were to borrow £10000 at an APR of 8% over a ten year period, the monthly repayments would be £150. If the same personal loan was to be repaid in five years, the monthly repayment would be £233.33, so you’d need to find an extra £83.33 a month. However, for the ten year term, you would repay a total of £18000 whereas the cost of the same loan over five years would only be £14000.