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The Advantages and Disadvantages of a Loan Secured Against Your Home

Posted July 23, 2012 by Ian Nuttall to Finance 0 0
This post was written by a EasyFinance.com Community member. The views expressed below may not reflect the views of EasyFinance.com.

In the current economic climate, it is quite common for homeowners with a decent credit history to be struggling with cash flow, monthly loan repayments, credit cards and other personal finance.  Since the whole Greece fiasco, and with other countries like Spain in trouble too, many banks are having their credit rating slashed, which means that borrowing money is more expensive.

One option for people who do have equity in their home is to take out a consolidation loan secured against their home.

Essentially, a secured loan is an amount of money borrowed under the condition that if you aren't able to make the repayments successfully, the lender can repossess your home and sell it to recoup their money.

It can be a risky strategy because nobody wants to lose their home, but if you are able to clear your existing debt and lower the monthly payment, it can be hugely beneficial -- especially when there aren't as many good opportunities to borrow money at the moment.

Let's look at some of the advantages and disadvantages of taking out a secured loan and see whether or not it's a right fit for you and your current situation.

Advantages of Secured Loans

  • Higher lending.  There may be times when you need to borrow a larger sum of money than you are able to be accepted for with a personal loan.  Higher amounts tend to have more stringent credit checks and unless your credit rating is stellar, you may not be accepted.  With a secured loan, you are borrowing against your home equity and this reduces the risk to the lender - allowing you to borrow enough to cover existing debts.
  • Low interest rates.  When you have equity in your home it is easier to secure a lower interest rate.  This works because the risk is lower for the lender, and they can be more competitive with their rates because of the reduced risk.
  • Longer borrowing.  Unlike the fixed 3-5 year borrowing of unsecured loans, you can take out secured loans over a longer period.  This can be very helpful with reducing your monthly payment amount to make your cash flow more affordable.  Just be aware that the longer you have the loan, the more interest you're likely to pay.

Disadvantages of Secured Loans

  • Longer debt.  Although it will make your payment schedule easier and more maintainable, with a secured loan you will most likely be paying it off for longer than you would if you continued your existing payment schedule.  Be aware of this before you decide on whether it's the right debt solution for you.
  • Higher repayment.  The longer the loan, the more the interest.  This means that on a long, secured loan you will most probably end up paying back more than you would with a shorter unsecured loan.  Again, because this is done over a longer period it makes your monthly payments more manageable -- which for many people consolidating debt is the initial goal.
  • Losing your home.  There is a very real danger that if you fall behind on your payments or are unable to keep up the loan that you will lose your home.  If you are not sure you could stick to the monthly payment amounts for the agreed time length, you may be better off seeking alternative debt management plans.

Secured loans can be a high risk, high reward strategy so think very carefully before making any decisions.  It can be a very savvy financial move to reduce monthly payments, keep on top of bills and improve monthly cash flow -- but only if you are confident that you can keep up the payments regularly and can avoid taking out any more personal debt which would jeapordize your ability to make repayments.

For those that would struggle to keep their credit card in their wallet, there are other ways to reduce your debt so make sure you research other options -- like debt management plans, bankruptcy etc -- too before making the final decision.


About Ian Nuttall: Ian Nuttall is a personal finance blogger at debtconsolidation.org.uk, helping people to make the right choice with their debt strategies. For more information, add him to your Circles on Google Plus.

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