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2008-01-27 05:24:21
Using Your Home or House As Collateral For a Loan: The Pros and Cons
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 When you hear the words "house as collateral for a loan", you probably have shivers run down your back. Surely pledging your home or at least the equity that you have built up in your home can't be a smart idea?
Well, not so fast. In some situations, pledging the equity in your home or flat as collateral can be a shrewd move, saving you thousands of pounds in interest per year and allowing you to borrow substantial sums of money.
This is what is known as a "secured loan". If you own a home or flat and are a resident of the United Kingdom, then you usually qualify.
With a secured loan, you are able to secure significant amounts of borrowing power. If you want to know exactly how much money you would be eligible to borrow, simply use this formula:
Appraised Value of Your Home Multiplied by 1.25 Minus Your Outstanding Mortgage
So, if you have a home that is worth 200k pounds and you have a 50k mortgage on the property then you would be able to borrow 200k pounds (200,000 x 1.25 - 50,000). Keep in mind that most secured loan firms will only lend up to a maximum of 100k pounds though.
The other benefit of a secured loan is much lower interest rates than an unsecured loan. A typical variable rate for a secured loan is around 8.5 - 9.0% APR, whereas with an unsecured loan you would be paying 15-16% APR. This is a huge difference over the life of a loan, plus your borrowing power is significantly cut when taking out an unsecured loan.
Just like with a mortgage, you need to make sure that you keep on top of your payments and then there is nothing to worry about. Most secured loan companies will offer PPI (payment protection insurance) to protect you if you fall ill or are injured and can't keep up with your payments.
Secured loans can be taken out for a wide variety of different reasons, including debt consolidation, new vehicle financing or home renovations.
If you own a home in the UK, have a mortgage and need to borrow a significant sum of money, then a secured homeowner loan if a smart choice.
Apply for a Lending Place secured loan today!
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