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Should I take out a Secured Loan?

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Should I put up collateral?

When taking out a loan for any purpose, it could be anything from someone buying a property as a first-time buyer or a landlord adding additional properties to their portfolio.

Alternatively, it might be someone looking for a loan who needs the money to expand their business and do not have the cash in the bank to facilitate the expansion.

Another reason for someone taking out a loan is to cover the purchase of a car so; they take out a car loan. One of the most common types of loans are short-term payday loans. These short-term loans might be bad credit loans, but whatever the type of loan you are looking to take out the question is whether you ought to put up some form of collateral for the loan.

When you apply for a loan the lender will look at two points, which are:

1. Can you afford to repay the loan

2. What does your credit score and credit history say about you.

Regardless of whether they are lending millions of pounds over 25 years or £300 short-term loan over a few months, all lenders want to minimise the risk to their capital, and they can only do that by performing their due diligence.

The best place for them to start would be to examine your credit history to see how responsible you have been in the past with credit. The points which they will always look for are:

  1. Did you pay the loan back on time and in full?
  2. Did you miss any payments?
  3. Have you ever defaulted on any loans in the past?

Your payment history is a very large determining factor of whether you are granted the loan. In it important to always look after your credit score. Even if you do not think that you will need to take out a loan any time soon, you never know what the future holds.

A poor credit score would indicate to the lender that you are a high-risk borrower and as such they the lender will most probably charge you a higher rate of interest.

When you take out a loan make sure that you can afford the repayments and that you do not miss any repayments.

If you miss monthly payments, and/or pay late, and it drastically affects your credit score. It brings it down, and a low credit score will either cost you the loan or cost you with a high interest rate due to being perceived as high risk.

So, what are you to do if you have poor credit and are looking for a bad credit loan? Well, all is not lost. You can reassure the lender but putting up collateral as security.

Collateral explained?

In the simplest term’s collateral is anything which has value that the lender could sell to recover the outstanding loan amount.

Collateral could be anything which you own, like property, cars, jewellery some lenders might take shares, although I have heard some work going towards being able to use crypto currency as collateral.

Even thought it is very common to put up collateral when buying property or expensive cars on finance it is less common to put up collateral for a short-term payday loans. Although some might say that a guarantor could almost be considered collateral.

The more the better

The more collateral you the borrower can put up against the loan the less of a risk you present to the lender. Using a common example of mortgages. When you take out a mortgage the lender will expect to see anything between 5% to 25% of the property value as a cash deposit. The remaining value could be covered with securing the loan against the property you are buying. Alternatively, if you do have the benefit of another property you could also secure the mortgage against that property too.

Now the property becomes the collateral for the loan.

If at some point in the future, you default on the loan the lender can repossess the property to cover the cost of the loan. The lender will sell the property to recover their capital and any expenses they incur in the repossession and sale of the property.

If you were to ask most lenders which they would rather have, a loan which is not secured against any collateral or secured against something they can repossess they would probably all say the secured loan. It’s less risk and lenders are always looking at minimising their risk.

More Collateral = Less Risk, Lower interest Rates.

The formula is very simple, the more collateral you put up the lower the risk you present to the lender and therefore, the lower the interest rate will be for you. Therefore if you can put up collateral when considering a bad credit loan that you have collateral.

The difference in the interest rate between having a loan secured with collateral and one without could be quite significant if you are looking at taking out a very large loan, for instance a mortgage or a substantial personal loan. Over the term of the loan even a difference of a few percentage points can add up to tens of thousands of pounds.

All the saving you could pile back into buying additional property or start a business. The key point here is to reduce the money you are spending needlessly on interest if you have the means to repay the loan comfortably with collateral.

Money in the Bank Does No One Any Good.

Having assets like money in the bank earning little or no interest or equity in your property is a waste. It does you no good. If you can use that money or equity to purchase another property to rent out which will make you more money than it could have earned sitting in the bank.

Even when you use your property as collateral for a loan you can still live in the house. No one is going to take it away from you. It just means that the lender holds a “lien” or interest against the property.

The lender will only exercise the lien if you default on your loan repayments. Using property as collateral is generally the most common type of security. Since a property can’t be moved or hidden, unlike say a car or jewellery which could be hidden or sold.

If you were to use your car then the lender would have a “lien” against your car in the case of logbook loans.

Each lender will be different, and they may not all take security in the form of a car or property, it all depends on the individual lender.

Payday lenders normally do not expect any security for the money which they lend. Payday loans are for small amounts of money for a short period of time.

Although if you take out a short-term loan with a lender for a few thousand pounds they may ask for security and now the loan becomes a secured loan.

What can I use for collateral?

As stated above, this all depends on the lender. If you are taking out a mortgage for a considerable sum of money, then the lender would expect property as security. The same would also apply for large business loans. The lender would ask the company directors to put up some sort of security such as their own property as collateral.

If the business does not do well, or it goes under then at that point the lender can repossess the director properties.

What are the other options?

If you are looking for a bad credit loan for small amounts of money it is unlikely that the lender will request or require any security.

If you do need a loan and have poor credit, then the other option is to take out a guarantor loan where someone you know, and trust will act as the guarantor to the loan. If you default on the loan then the guarantor will be liable to pay the debt.

Alternatively, you could look up the many companies on-line offering peer-to-peer lending for individuals and businesses.

But remember, if you default on a secured loan the lender will repossess any collateral you have put up against the loan.

Debt management agencies are regulated by The Financial Conduct Authority

Many people in the U.K struggle with debts and many do not know how to start to repay them speaking to a debt advisor is one of the best things you will do along with taking action yourself by speaking directly with your creditors.

https://www.nationaldebtline.org/ and https://www.moneyadviceservice.org.uk

You should always seek professional advice when handling debt problems. Cashute are not licensed debt advisers and any information contained in this article should not be taken as legal advice. It is your Responsibility to seek out correct legal advice

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Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk