A secured loan is a type of loan where you are using an object as collateral. In theory, this can be absolutely anything, but in practice, this is going to be something like your house or a car. Whenever you take out a secured loan, you must take extreme care because if you fail to make the repayments you could lose your biggest assets.
Getting the best deal on a secured loan could mean the difference between making those repayments and having your home repossessed. So how do you go about getting the best deals on secured loans?
All About Risk
You need to look at secured loans from the point of view of the lender. Everything revolves around the concept of risk. The higher the risk, the more you can expect to pay. The lower the risk, the less you can expect to pay.
Demonstrate, as far as possible, that you are not a risk to the lender. You can do this in a number of ways, which we will go into more detail on as you read this page.
The Credit Score
Your credit score is often seen as less important when it comes to secured loans because many people have to opt for secured loans due to their poor credit score. In the case of a mortgage (the most common type of secured loan), the rules and circumstances are different.
The chances are you not applying for a secured loan because you have a poor credit score. You are applying for one because the sums of money are so vast that without some sort of security it leaves the lender experiencing an enormous amount of risk.
You can have a 760 credit score and still have to take out a secured loan. But a higher credit score will lead to you experiencing a fair number of benefits, including:
- A lower deposit. Most lenders will allow you to contribute less in order to receive the loan.
- Reduced interest rates. This is the big difference because in the long-term even a slight change in interest rates will mean savings of thousands.
- The chance to borrow more in the first place. Larger loans are reserved exclusively for those with better credit scores or those with greater assets.
If you have a poor credit score, it could be profitable to wait until you build it up. This will secure you a better deal on your secured loan in the long-term.
A Greater Asset
If you have a more valuable asset, you will be able to ask for more money. This acts as reassurance for the lender because they know that they will be able to claim even more of their loan amount back should you be unable to make any further repayments.
However, if you are trying to get a mortgage, it does not work this way. You cannot simply buy a bigger house because you do not actually own that asset when you take out a mortgage. Instead, you need to either have another valuable asset that you can secure the loan with or another property that you can use as security.
Newcomers to buying houses tend to use other properties as securities to buy further properties. Lenders are happy to do this because they have not only an asset but an asset that has the potential to generate a regular income.
Can You Make the Repayments?
The main question you have to answer is whether you have the potential to make the repayments in the first place. Making these repayments will require you to show that you have the income to back up your loan. These days lenders are more conservative than ever before, so they are never going to take a risk on you.
There are plenty of loan calculators online that you can use to help you calculate how much of an income you will need to make the repayments on a particular secured loan going forward. The lenders themselves often provide these calculators.
Comparison Shopping and Thinking Outside the Box
You should always shop around to make sure that you are getting the best deal. When looking for a secured loan, you can look further afield than just the banks. There are private lending organisations outside the banking system that provide entirely fair secured loans.
To begin your search for a secured loan, you should look online and use a series of loan calculators to find out whether you are even eligible. Once you have done this, you should call them directly. In most cases, you will be asked to make an appointment to make a formal loan application.
You will have to bring in various forms of income proof, and the lender will conduct a credit check on you in order to better advise you on how much you can borrow to fund your purchase. Over the next few weeks, you will receive various loan offers to compare.
Sometimes it pays to be patient when getting the best deal on a secured loan. If you have a less than stellar credit record, or your income is not sufficient enough now, you may want to wait until you can get a better deal. Patience will enable you to save money in the long-term.
You just have to be willing to wait. You are under no obligation to accept any loan offer.