What is Secured Debt? – Everything You Need to Know with Guide, FAQs & More
If you’re looking for a loan, you may be looking to get one with the cheapest interest rate.
However, a loan having lower interest rates isn’t the only thing you should be thinking about.
You also need to decide whether you want it to be a secured or unsecured loan.
Today, I’ll be talking about secured loans including their benefits as well as their risks.
What is a Secured Loan?
A secured loan is a loan that is tied to a valuable asset that you own. The debt you owe due to this loan is known as ‘secured debt’.
Thus, the loan is ‘secured’ against whatever valuable asset you put up. This means that in the future, if you start failing to make your repayments towards it, then your creditor has the right to take that asset from you in order to make up for the debt.
Secured loans are often for larger sums and they are often used to buy a specific item such as property or a vehicle.
Secured loans often set the maximum Loan-to-Value (LTV) ratio.
What is the Loan-to-Value (LTV) Ratio?
The loan-to-value ratio is the amount of a loan compared with the value of the asset that that loan has been secured against.
For example, if you have property that is worth £100,000 and the maximum LTV percentage for it was 80%, then the maximum amount of money you could borrow with a secured loan would be £80,000.
Keep in mind that while the maximum LTV percentage does set an upper ceiling, the amount of money you can really borrow using a secured loan depends entirely upon how much you can afford as well as your credit history.
What are the Different Types of Secured Loans?
There are a number of different secured loans you can opt for. These typically differ depending on what asset you’re offering as security for the debt.
As the name suggests, these loans are secured against your home. They are typically used to secure sums larger than £25,000 and the repayments last for a relatively longer period (anywhere between 3 to 25 years).
You use your vehicle to secure these types of loans and the money you borrow using these loans can be for any purpose.
You use this loan to buy a vehicle. That very same vehicle is the security for these types of loans. This means that if you fail to make your repayments, then the vehicle would be taken back. If you successfully finish making your repayments, you then own the vehicle outright.
These loans can be secured against your home or your vehicle as well as any other valuable asset you may have. The sum from this loan is used to pay off any existing debts you may have.
What is the Difference Between Secured and Unsecured Debt?
The main difference between secured and unsecured debt pretty much lies within the name:
Secured debts mean that the debt is “secured” against something. This would be any valuable asset of yours such as your home or vehicle. This means that if you fail to make payments towards a secured debt, there’s a chance that the asset you offered (your home or vehicle) as security for that debt could be taken away from you.
As for unsecured debt, you do not offer any asset to “secure” it. This means that a creditor cannot take any assets of yours away if you start failing to make payments. That being said, a creditor can still pursue you in other ways if you start missing your payments.
What are the Pros and Cons of having Secured Debts?
Going for a secured loan rather than an unsecured one definitely has its advantages but there are also risks involved that you should be aware of.
- You can borrow much larger sums as compared to unsecured loans.
- You can have a secured loan even with a poor credit score.
- You can pay off your secured debt over a much longer time period as compared to unsecured debts.
- They put your assets at great risk. The repayment period for secured debts is usually quite long and if you start failing to make payments at any point, you could lose whatever asset you put up as security such as your home or your car.
- LTV ratios limit what you are able to borrow.
- The rates can vary rapidly.
Why Shouldn’t I Just Get an Unsecured Loan and Keep My Assets Safe?
Unsecured debts are definitely much easier to manage but they also have a lot of limitations.
For example, you cannot borrow more than £25,000 using an unsecured loan.
Furthermore, since you’re not putting up anything as security, it may be very difficult for you to get one if you have a bad credit score.
Your lender will decide whether or not to approve your application based on your credit history, your income, how much you want to borrow as well as how long you want to borrow it for.
Can I Get My Unsecured Debts Written Off?
Yes, it’s definitely possible for you to get some or all of your unsecured debts written off such as credit cards or a personal loan.
However, you will most likely have to enter into some sort of debt solution process such as an Individual Voluntary Arrangement (IVA) or a Debt Relief Order (DRO).
You can also get some of your unsecured debts written off through a full & final settlement offer.
For more information on how to get your unsecured debts written off, you can click here.
Can Unsecured Loans be Used for Debt Consolidation?
Yes, you can definitely use an unsecured loan to consolidate your debt.
You could use it to consolidate all of the debts you have such as credit card debt or personal loan(s), etc.
However, an unsecured loan can definitely have much more restrictions as compared to a secured one so you need to be wary of that.
For example, as I mentioned earlier, you can’t borrow more than £25,000 using an unsecured loan. Thus, this could only work if the sum of all your outstanding debt is either £25,000 or lower.
Be sure to look at interest rates of the loans you’re trying to go for and always opt for the one that has a lower one compared to the debt(s) you have currently.
For more information on how to apply for an unsecured debt consolidation loan, you can click here.
Secured debt can definitely be an effective way of financing a certain asset but of course, there are many risks involved with it.
If you’re considering going into secured debt in order to fund a home or a vehicle, I highly suggest you perform a financial assessment to ensure you can afford it before entering into an agreement.