What is a Secured Loan?

Secured loans may prove to be a viable and economic way of obtaining capital for any one of a number of purposes.

The basic principles behind a lender offering a loan with security are relatively straightforward:

  • Providers will always seek to reduce the risk of being unable to recover their money in due course;
  • If the borrowing is secured against a capital asset (such as your home or car), the provider may see this as reducing their risk – this may encourage them to look more favourably on the application;
  • As the potential borrower, you will be hoping to obtain lower interest rates and possibly larger loan amounts, by virtue of the fact you are offering collateral for the loan, thereby reducing the provider’s risk.

What is ‘collateral’ and how does it work?

This is also relatively simple:

  • in effect, you guarantee your repayment of the amount by linking it to something of significant value that you own – property and motor vehicles are classic examples;
  • should you be unable to repay the loan amount, the provider may seek to force the sale of the asset, guaranteeing the amount in order to recover the money they are due from the proceeds.

However, it is important to note that providers are typically very reluctant to take this step and will always do what they can to avoid this situation.

Unsecured loans may be available from some providers but they are typically reserved for smaller loan amounts. They may also be offered at a higher interest rate than secured lending, due to the increased risk the provider is taking.

You should remember that your home could be at risk if you fail to maintain payments on any loan that is secured against it. However, secured loans are long-established financial products that, when used properly, can give you a significant cash injection just when you need it.

Secured loans can be used for any conceivable purpose, with secured car loans, home improvement loans, wedding loans, debt consolidation loans and even secured business loans available as possible borrowing options.

Bad debt loans are also available for those who have experienced financial difficulty in the past.

What you need to know when applying

As part of your loan application, you will need to provide certain key information to the potential provider.

Drawing upon their professional experience and expertise, they will use this information to try and help you to decide on a realistic loan amount that you will be able to borrow and comfortably repay.

This is why it is important for you to provide open and honest declarations as part of your application, particularly where your employment and overall financial status are concerned.

Any application will typically be subject to a credit history check.

One of the advantages of secured loans is that, by offering one of your assets as security, you are indicating something of your overall financial position to the potential provider. This means that they may be less concerned with credit history problems than an unsecured loan provider might be.