Secured Loan. 5 Reasons To Stop And Think Before Taking Out One
Taking out a secured loan can have far reaching consequences for your finances, and so it pays to take your time over the decision. This article discusses some of the potential drawbacks that you should be aware of before committing to a loan.
Secured loans are a popular way of raising funds for homeowners, and there’s no denying that taking one out can be a great way of organizing your finances. Debt consolidation, financing home improvements, even paying for a new car – secured loans can be used for all of these. However, as with any financial agreement, it’s only sensible to take your time when deciding whether to proceed. After all, with a secured loan, you could be betting your home on a successful outcome. As the name indicates there is an exchange of a security home / Business / an asset which is secured by the lender as the first mortgagor, So what things do you need to consider before finalizing your application?
Firstly, as just alluded to, it’s an inescapable fact that taking out a loan that is secured on your home could potentially put your home at risk. Should you fall behind on your repayments, the lender can apply to seize your property, evict you from it, and then sell it at less than market value to clear the debt. Scary, huh?
This is, of course, a fairly rare outcome, and most lenders are happy to work with you if you do get into trouble, using repossession as a last resort, but you should consider this carefully before taking out a loan, especially if you’ll be converting existing unsecured debt into secured though debt consolidation.
The second problem with secured loans is that they tend to be for fairly high amounts, and repaid over a fairly long term. This means that the amount of interest you’ll pay over the entire term may be substantially higher than you might think. Even with a low LVR (Loan to Valuation Ratio), secured loans are a cheaper option when compared to unsecured where in the maximum amount borrowed for personal use is $ 60 K depending upon the lender.
Thirdly, if you use a secured loan to wipe out some existing unsecured debt, you may get the illusion that your debt levels have lessened. There’s then always the temptation to use your credit cards etcetera to build up fresh debts, so you now have secured AND unsecured debt hanging over your head, and you’ll be in a worse position than ever before, hence the solution to managing debt is to pay off and close any unsecured debt in to a secured debt
A fourth problem with a secured loan is that you will, by its very nature, be removing equity from your home. In other words, the value of your home and the amount of debt secured on it will be much closer. Considering that today’s property prices are at record highs, and that many experts are predicting a fall in the near future, you could then be left in the unenviable situation of owing more than your home is worth – that is, you could fall into negative equity which has never happened in the past but something you need to be mindful off.
The fifth problem we’ll cover is also related to the removal of equity from your home. Should you in the future wish to take advantage of a refinancing offer to reduce your mortgage costs, it helps to have as much equity available as possible in order to secure the best deal. A secured loan now could harm your remortgage prospects in the future.
So, has all this put you off the idea of getting a secured loan? It shouldn’t, as you may still benefit greatly from restructuring as it has many benefits so far you have taken the above into consideration in making a knowledgeable decision & are informed well. However, it’s a big decision, and this is why you need to be aware of the possible problems first, so that your decision can be as informed as possible.