Advantages and Disadvantages of a Secured Loan
This Type of Loan is not Always the Answer to Personal Debt Problems
Mar 18, 2009
For those who think a secured loan might be the answer to mounting personal debt problems think very carefully, slick salespeople and glossy seductive advertising will tell the borrower it’s the answer to all their problems. However on many occasions it is not.
Credit Score
For those with a good credit score and looking to borrow less than £25,000 do not consider a secured loan, there are cheaper and less risky ways of borrowing.
However if a secured loan is the only way forward don’t pick the first one that pops up from an Internet search, instead try one of the price comparison websites for the best possible deal.
Advantages of a Secured loan
- Generally a secured loan is easier to obtain, even for those with a poor credit score although people who fall into this category may be faced with a higher interest rate.
- Secured loans are often available up to £75,000 against a £25,000 ceiling for unsecured loans.
Disadvantages of a Secured Loan
There are a number of disadvantages of a secured loan. It is essential therefore that a person considering this route thinks very carefully before signing on the dotted line.
- Borrowing for a longer period (up to 20 years) means lower payments but substantially increased interest charges. Also bear in mind with a larger loan and longer repayment period comes a fairly substantial set up charge.
- Some form of security, usually a house, is needed.
- The amount the borrower is willing to lend is determined by the equity in the property, an increasing problem in today’s credit crunch.
- If loss of work or loss of health means payments are missed the house could be repossessed.
- Payment Protection Insurance (PPI) from the lender is on many occasions a much more expensive option that going to an independent broker.
Alternatives to a Secured Loan
- For smaller amounts there are a range of 0% interest credit card deals out there but care and advice is needed to make the best use of them.
- Personal or unsecured loans are usually a better option.
Debt Management Advice
If it’s debt management advice that’s needed, there are a number of free, independent and reputable agencies out there. For those in trouble there is no need to pay for this advice.
Try the Citizens Advice Bureau (CAB) or the Consumer Credit Counselling Service (CCCS)
This information is obtained from the sources listed below but is not offered as financial advice.
Sources
Financial Services Authority
Martin Lewis, moneysavingexpert.com
Clare Francis, moneysupermarket.com
Consumer Credit Council (CCCS)
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