For short term loans, or borrowing relatively small amounts of money, there are several different options including a secured loan.
Some people decide to apply for payday loans. The transaction is simple. The money is borrowed, then repaid through the following months.
Secured loans add an extra element to the lending and borrowing process. They are other options available, if you need to borrow money.
A secured loan
As the name suggests, a secured loan is a loan secured against your property.
You give the lender something that you own, in exchange for the money that you borrow.
If you repay your loan on time, your possession is usually returned to you.
If you cannot repay your loan, your possession can be taken by the lender. It is usually sold, to raise funds to clear your debt.
A mortgage or car are probably the most popular types of secured loan, but unlike a pawnbroker, you retain the use of the asset during the time you repay.
Benefits of a secured loan
Payday loans have been often criticised in the past for their high interest rates. The interest rates are high because of the risks involved with this type of lending.
Lenders charge high levels of interest to mitigate the risk of non-payment.
Secured loans mitigate these risks in other ways. The lender is protected, because they have something to sell if you cannot repay what you owe. As a result, they can often offer loans with lower interest.
With a Wonga payday loan, the representative APR stands at 1,261%. Secured loans often publish APRs of between 200% and 500%.
As a result, secured loans often work out cheaper than payday loans.
There is also a chance that you will receive an offer for a loan, even if other lenders have not approved your borrowing. This is because you have provided a valuable item in exchange. The lender has a good chance to get their money back, even if you cannot afford the repayments.
Drawbacks of a secured loan
Your possessions are at risk.
When you borrow money, you use something you own as security.
Unfortunately, none of us can predict how our debt stories play out.
It is important only to borrow if you have a clear repayment plan. There is still a risk that you may lose your job, or have further emergency costs that make on-time repayment impossible.
It is important to consider these risks, before taking out secured loans.
In some cases, you can continue to use your security item for the duration of the loan. It is only taken if you cannot keep up with repayments. But, some lenders need the security up-front. You can lose your possession for the duration of the loan, to be returned when your debt is fully paid.
Types of secured loans
Within the UK loan market, there are many different types of secured loans.
Some are for short-term or low value borrowing. Other options are for larger sums of money, over longer terms.
Pawnbrokers are usually high street stores.
They offer secured loans, in exchange for something you own as security. In this case, the item is taken from you and returned once you have paid back your loan.
Pawnbrokers traditionally accepted jewellery items or antiques, but you can pawn anything of value. Each pawnbroker will have their own list of items that they accept.
High street pawnbrokers
Well-known pawnbrokers include:
- Cash Converters, who will offer loans of up to £10,000 with an asset for security. With Cash Converters, loans are provided over a six-month term.
- The Money Shop, who provide short term loans secured against high value watches and jewellery items. Loans are provided over seven months.
Though Cash Converters, H ]&T and The Money Shop are three of the biggest pawnbroking names, there are many similar companies. You may even have smaller, independent pawn shops in your hometown.
High street pawnbrokers offer extra security for you, as the borrower. You know where they are and can visit in person. Yet, there is another option that you may find more convenient.
Becoming increasingly popular, online pawnbrokers offer the same service as their high street counterparts. In this case, you will send your item using a secure courier.
Operators like hwww.borro.com are are of the better known operators, specialising in high value products.
Online pawnbrokers may be better for people that want extra privacy, or do not have the opportunity to get to a high street pawn shop. But, the process is slower. You will need to wait for your item to reach its destination, before you receive your money.
We suggest extra caution when dealing with online pawnbrokers. If you are caught up in a scam, you could send a valuable item and never receive anything in return. You may lose your valuables.
Logbook loans are secured against vehicles. Usually, you will agree to hand over the ownership of your car.
In most cases, you can continue to use your car throughout the duration of the loan term. You do not need to provide your vehicle before you receive the money.
Logbook loans may be suitable if you need a high value loan. Typically, they can be for any amount up to around £50,000. The amount of money offered to you will be based on the value of your car.
Logbook loans can be very risky. You will lose your vehicle if you cannot keep up with repayments.
Before borrowing, think carefully. Could you manage if your car is taken from you?
The logbook loan borrowing process
To borrow money, you will need to provide your vehicle registration documents. The lender becomes the temporary owner of your vehicle.
Usually, you will have a year or two to pay your loan back in full. For low value loans, there may be a shorter loan term. Lenders may ask for weekly or monthly payments.
If you have an existing car finance agreement, you may struggle to get a logbook loan.
If you are unable to pay back what you owe, the lender has the right to use bailiffs to seize your vehicle. They are unlikely to act until you have missed many payments, but you are at risk as soon as you start missing payments.
Hire purchase and personal contract purchase
Many people buy large value items, such as cars, on credit.
If you do this using a personal contract purchase or hire purchase agreement, then you are using a secured loan.
In these cases, you do not make the purchase outright. The credit provider can collect the car, or other purchased item, if you do not keep up with repayments.
The biggest secured debts are mortgages. These are large loans that cover the cost of a house (after a deposit payment is made).
When buying a £160,000 house with a 10% deposit, you would take out a £144,000 mortgage. The debt is secured against the house that you are buying, which means that the property may be repossessed if you cannot keep up with repayments.
You can reduce the interest, and make your repayments smaller, by providing a larger deposit. If you can save 40% of the property value to put down as a deposit, you are likely to receive a cheaper mortgage.
Term lengths vary for mortgages, but are usually around 25 years.
Committing to a mortgage
Most people spend more on their house than anything else that they ever buy.
Committing to a long-term secured debt can be extremely daunting. It is important to think carefully before making the decision.
Different mortgage lenders will have different lending policies, but most will expect a deposit of at least 10%. They will also run affordability assessments, like those carried out during any loan application.
Many people apply for a mortgage directly through a bank or building society. Other options include mortgage advisors and mortgage brokers.
By seeking advice before applying for a mortgage, you can find which will be the most suitable. This is particularly important with such a large loan.
Two types of mortgage
Some mortgages are repayment mortgages. These have larger monthly repayments. Each month, you pay the mortgage interest and some of the original value.
Other mortgages are interest-only. As their name suggests, these do not include a payment towards the original value. Interest-only mortgages are cheaper than repayment mortgages, but you will not be clearing your debt.
With an interest-only mortgage, you can defer the cost of buying a house. You pay interest, building funds elsewhere to cover the cost of your property. These mortgages come with a much higher risk. You will have a huge debt to clear before the end of your mortgage term, and will not be minimising the debt with your monthly payments.
If you choose an interest-only mortgage, you need a clear and reliable plan for paying for the property that you have purchased.
Once you own a property, you can borrow money against it. This means that you are using your home as collateral for the loan.
Secured loans can be for large amounts of money. The money offered is in exchange for your agreement to put your house at risk.
Usually, secured loans have much lower interest rates than their unsecured equivalents. This is because lenders have a way to claw back their money. If you cannot make repayments as agreed, then you will risk losing your home.
A secured loan could be an option if you need a large amount of money, and may be suitable if you have adverse credit.
Some people use secured loans to fund home improvements. They can also help to reduce monthly payments and interest when used for debt consolidation.
This type of loan may be also advertised as a homeowner loan.
Things to think about when applying for secured loans
It is always important to check if borrowing is essential.
Can you instead save the money, and make your purchase outright?
It is advisable to avoid debt wherever possible. This is even more true with secured debts, which can result in a loss of assets.
Before taking out a secured loan, it is worth sitting down to look over your household budget. See if you can make changes, to reduce the need for credit.
It can be tempting to borrow money for home improvements, but these will be for nothing if you later lose your home.
Before borrowing, think carefully about the consequences. A secured loan could result in you losing your home, your car or valuable items such as jewellery, electronics and antiques.
Lenders should be regulated by the Financial Conduct Authority. You can find their details on the Financial Services Register, if they have been properly authorised.
They should also act under the requirements of the Consumer Credit Act 1974.
Before borrowing money, and before handing over some of your own belongings, you should check that the lender is fully authorised.
It is important that you get paperwork as a record of your loan agreement.
Pawnbrokers must provide a pre-contract agreement with a valuation. Like a credit agreement when you borrow the money and a pawn receipt for your item.
All lenders should provide records of your agreement, including loan amounts and loan terms. The paperwork will protect both parties.
Before borrowing, ensure that you receive all the relevant paperwork. This should set out clear terms for your loan, along with an agreed value for whatever you have provided as collateral. Make sure that you have reviewed this, and that you are happy.
Ongoing financial commitments
In most cases, secured loans are cleared once your belongings are ultimately sold.
Pawnbrokers are responsible for providing accurate valuations. If your property does not raise enough money at the point of sale, the pawnbroker will lose out.
For logbook loans, this is not the case. If your car sells for less than expected, you will still be responsible for paying back the shortfall. You may lose your car and still owe money to your creditor.
Before borrowing money as a secured loan, you will need to check what commitments you are making.
Will you be able to cover the shortfall, if you are expected to do so?
When you borrow money in the form of a secured loan, you agree to provide your assets as security. Usually, those assets will be your home or car. For smaller loans, you may provide jewellery or antiques.
If you cannot afford to repay your debt, the belongings provided as security may be taken by the lender. The proceeds from the sale of these items will go towards paying off your debt. In most cases, your debt will end at this point. Sometimes, you will still owe any shortfall after the sale.
If a loan is secured against your house or your car, you will usually still be able to use it. When you have a mortgage, you can live in the house and treat it as your own. With a logbook loan, you can continue to drive the vehicle.
Pawnbrokers may take your assets in exchange for lending their money. This means that your belongings are taken from you, and kept by the pawnbroker, for the duration of your loan term. When you have repaid your debt in full, you will get your items back. If you cannot keep up with repayments, the lender may keep what you have given them.
Secured loans are high risk credit options.
You may lose some of your possessions. But, they can also come with benefits. They often have lower interest rates than unsecured loans, and can be available to people with poor credit.
Providers of secured loans are subject to the same regulations as other lenders. They should be fully authorised by the Financial Conduct Authority. And should feature on the Financial Services Register.
You can protect yourself from scams by checking that a lender is authorised. Furthermore, you can ensure they provide you with all the relevant paperwork.
Any agreements that you give must be clear about the agreed value of your collateral, and the length of the loan term.
You should also know if the sale of your asset will clear your debt in full, or if you could end up owing more money.
Before borrowing, you should be confident that your loan is necessary. Make sure that you have a repayment plan.
You should not risk your home, or vehicle, for a purchase that is not essential.