All about secured loans

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A secured loan is a loan agreement in which the borrower pledges a property as collateral for the loan; therefore, they are also known as home loans. If the borrower repeatedly fails to repay the loan, the lender can take action to recover the debt, including selling the property.

Advantages and disadvantages

When it comes to something as valuable as your property, lenders know you’re likely to honor the agreement. Add to that the additional financial security your property provides, and it’s easy to see why lenders consider you a low risk. For example, you can expect an interest rate one to two percentage points lower than an unsecured loan, you can borrow larger amounts (up to 125% of your property’s equity), and you can spread the loan over a longer term.

The biggest disadvantage of a secured loan is the risk of losing the property. You must be absolutely sure that you understand the terms of the contract and that you can afford to repay the loan. If you are in financial trouble, most lenders are sympathetic and will do everything they can to help you restructure your debt. After all, the last thing they want is a lengthy court case that involves high legal fees. However, it is important to know that your property is at risk.

Should I take out a secured loan?

Before taking out a secured loan, you should carefully consider what you need it for. Secured loans can make financial sense in the right circumstances – for example, if you want to consolidate a number of small, expensive debts, such as credit cards, into a single monthly payment. However, if you intend to use the loan for a purchase like a new car or a vacation, you should start saving.

There is a compelling argument for taking out a secured loan to finance renovations, as it will increase the value of your property. However, repayment is long-term and depends on the upturn in the real estate market.

Find the best offers

Everyone knows that there are good loan offers on the Internet; the difficulty is finding them. Unfortunately, there are no real shortcuts, and the key is to do as much homework as possible first.

First, contact several brokers (make sure they are registered with FISA) and see what they can offer you. Larger brokers may be motivated by sales goals and may try to pressure a particular lender.

FISA regulations state that lenders may not make contact until seven days after the initial loan agreement is sent. This “cooling-off” period is intended to allow potential borrowers to consider their options. Use it carefully to compare brokers. Remember, you are not making any commitments until the loan agreement is signed.

Don’t be fooled by unrealistic loan offers over the phone. Unscrupulous lenders often promise unrealistic interest rates in hopes of getting their hands on your pay stubs. Once they have your records, they often change the terms of the loan. If this happens to you, go elsewhere.

If you continue to have difficulty finding a suitable loan, consult an independent financial advisor.

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