What are pros and cons of secured loans?

Secured loans can be a valuable option for borrowers looking to access potentially lower interest rates, especially when facing a poor credit history. The key factor that sets secured loans apart is collateral—an asset you pledge to the lender as security for the loan. But while collateral can make borrowing easier and more affordable, it also comes with certain risks, such as the potential loss of your asset if you fail to make repayments. 

In this guide, we’ll explore how a secured loan works, its key benefits as well as the drawbacks you need to consider. By understanding both the pros and cons, you will be better equipped to make an informed decision about whether a secured loan is the right choice for you.

How does a secured loan work?

A secured loan requires you to offer an asset, typically your home, as collateral, which the lender can claim if you fail to repay. Generally, the more equity you have in your property, the more favourable your chances of qualifying for a larger loan. This is because higher equity increases the lender's security, making you a more attractive borrower and improving your likelihood of approval.

What are the pros of secured loans?

Increased Loan Approval Chances

If you have a poor credit score, using collateral to secure a loan may increase your chances of obtaining a loan. Lenders are more likely to approve your application because the asset reduces their financial risk.

Easier Loan Access for Poor Credit Borrowers

Using collateral makes it easier to secure a loan, especially for borrowers with a history of bad credit. The asset acts as security, reassuring lenders that they can recover the loan amount if needed.

Higher Borrowing Limits

A secured loan allows you to borrow more compared to an unsecured loan, where there is no collateral. Since the loan is tied to a valuable asset, lenders are more willing to offer higher loan amounts.

Lower Interest Rates

Secured loans often come with lower interest rates. This is because you’re providing security against the loan, which reduces the lender’s risk with collateral.

What are the cons of secured loans?

Risk of Losing Your Asset

If you fail to make the loan repayments, the lender has the right to legally seize the collateral you have pledged. This could mean losing your assets tied to the loan.

Legal and Financial Consequences

In addition to reclaiming your asset, the lender may also take legal actions against you if you fail to make your monthly payments. They can:

  • Take you to court to recover the debt.
  • Report missed payments to credit bureaus, negatively impacting your credit score.
  • Engage debt collectors to reclaim the owed amount.

Longer Approval Process

Secured loans often require a more thorough assessment of the collateral, including its valuation. This additional step can make the loan approval process longer compared to unsecured loans.

Summary

Before taking out a secured loan, it is important to weigh up the costs and benefits of doing so. Before applying for a secured loan, always check your credit report. Knowing what your credit score is may help you understand your options when it comes to borrowing a secured loan.

At Central Trust, borrow up to £250,000 with our secured loans.  We take a holistic approach when looking at our applications and consider all credit histories. Even if you have a poor credit score, we will always aim to help you get the money and support you need. Call our free on 0800 980 6273 to speak with one of our experienced advisors who will support you from start to finish.

THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.