What types of loans are available?

A secured loan, or ‘homeowner loan’ as they are sometimes known, is a way in which people are able to borrow larger sums of money — typically anywhere between £1,000 and £250,000 — by using their house as equity against the loan.

Loans such as this are a useful option for individuals who perhaps have a lower credit score that prevents them from securing a lower-rate loan. However, it is worth remembering that there are particular risks associated with borrowing money in this way. An individual could, for example, lose their home if they find themselves falling behind with repayments. For this reason, it is important that anyone taking out a homeowner loan ensures they can afford the repayments.

Secured Loan Pros

Secured (homeowner) loans are available on the market for amounts ranging from £1,000 to £250,000, making them the only viable option for people wishing to borrow a larger amount.

With a fixed monthly payment which is perhaps even set to go out at the same day as the borrower’s mortgage, loans of this type are traditionally very easy to manage.

Secured Loan Cons

With homeowner loans, the amount an individual can borrow depends on a number of factors: credit score, income, the available equity in the property against which the loan is to be secured and the level of financial commitments the applicant already has. As a result, although a particular lender may sometimes offer loans up to £250,000, they may only be able to offer a fraction of that amount due to individual circumstances.

In common with most types of loan, the interest rate will also depend very much on the applicant’s credit rating.

The main disadvantage, however, is that in securing a loan against a property a borrower can face the prospect of losing their home if they can’t keep up with the loan repayments. This is something to consider very carefully before using this financial solution.

Alternatives to a Secured Loan

For those perhaps looking to borrow smaller amounts of money than you can get with secured loans, while at the same time avoiding placing their home potentially at risk, an unsecured loan might be a more attractive proposition.

Typically, the maximum amount offered by such a loan is £15,000 and it is offered usually over a three- or five-year period. Those wishing to borrow more than £15,000 on an unsecured basis, however, may experience difficulties when searching for a competitive interest rate.

A viable alternative for those wishing to borrow more than £15,000 is to look into re-mortgaging their property to free up the required capital. Remortgaging rates for homeowners sitting on a large amount of equity in their property currently start at a very attractive 2%. However, the potential for high upfront fees can deter some borrowers, as does the realisation that a remortgage effectively means an increased period of interest payments on the total loan amount.

Additionally, guarantor loans, which are a relatively new type of unsecured loan, offer the chance to secure finance for individuals who have seen their credit score damaged by either a past default or bankruptcy. As the name suggests, the loan agreement includes the provision of a guarantor, who undertakes to repay the loan should the borrower default

The Right Loan

As with most financial products, such as bank accounts and credit cards, offers on secured, unsecured and guarantor loans can vary. It is worth shopping around by going to as many different lenders as possible to ensure you get the best deal currently available.