Using Secured Loans for Debt Consolidation
A secured loan is one in which the borrower's home is used to provide a guarantee that the loan will be repaid. In the worst case, a secured lender can force the sale of a house if the borrower defaults on the loan, and so any decision to consolidate unsecured debt into a secured loan must be considered very carefully.
Getting into trouble with credit cards is stressful and dangerous, but will not ultimately lose you your home. Getting behind on a secured loan carries this very real risk, and secured lenders are known for pushing for repossession proceedings with greater vigour than even mortgage lenders.
Nonetheless, secured loans can certainly serve as good consolidation options, providing you are certain you will be able to keep up with the repayments.
Equity and Loan to Value (LTV)
In days gone by, you could borrow more than your house was worth, on the expectation that house price rises would mean you home would eventually be worth more than the value of your mortgage and secured loan combined.
These days, most lenders want to leave plenty of 'leg room' between what a property is worth, and the total amount of finance secured on it. Where once it was commonplace to borrow 100% or even 125% of the property's value, today a more realistic maximum is 80% 'Loan to Value'. So, if your home was worth £200,000, your mortgage and loan combined will probably not be able to be higher than £160,000.
Once the housing market begins to recover, however, things may change and lenders may consider lending to higher proportions of a property's value - although the days of 125% deals are probably gone forever.
Secured Loan Rates
Secured loans are often available for fairly decent rates, making them suitable for consolidating credit card and other expensive debts. They are also generally easier to be approved for than unsecured loans, although in today's climate even homeowners can find it difficult to raise finance without high credit scores.
Site is for information only and does not constitute personalised financial advice. E&OE.
