Types of loan – Secured, Unsecured, Home equity loans for Home Improvements

If you can't get more money from your bank or building society, for whatever reason, there are many loan providers willing to advance the funding you seek. Some home improvement deals may involve money being released to you in stages to take account of the amount of work completed. The final cost may differ from the budgeted amount so it is prudent to borrow only the money you need.

Secured loan

This involves the loan being secured against a major asset – usually your home or, in some cases, another property. These are cheaper than unsecured loans but if you miss any payments there is a risk of losing your home. Secured loans are most common when the requirement is to borrow a large sum of money (from, for example, £5,000 upwards) over a long period of time (up to 25 years).

It is not necessary for you to own your home or property outright to secure the loan although you must have sufficient equity in the property to cover the amount borrowed. Note, also, that it is possible to have more than one loan or mortgage secured on your property (although all lenders must always be made aware of additional loans taken out against the property).

The secured loan gives lenders a degree of safety since, if the agreed repayments cease, the lender has a claim on the property as compensation. The risk of losing their home in this way makes some borrowers wary of secured loans. However, a lender will more often than not take a long-term view and allow some leeway if you run into temporary payment difficulties since he has the security of knowing the property is there as collateral.

There are definite benefits to plumping for a secured loan – which, incidentally, is much easier to obtain than an unsecured loan which is generally only offered to people with a first-class credit record. The APR (annual percentage rate) is usually lower than on unsecured loans and there is more flexibility on repayment plans and terms.

Conventionally, loans are repaid through agreed monthly instalments. Flexible loans, which allow you to borrow and pay back at will, are more widely available than previously although interest is generally charged at a substantially higher rate. 

When deciding between a secured loan and unsecured loan it is worth remembering that while unsecured loans are not tied to a house or property penalties for non-repayment will still be incurred.

Allow time to arrange a secured loan as your home may need to be valued before the advance can be agreed.

Secured loans usually offer a much more flexible approach to credit problems. They can also be used to consolidate credit card debts and other loans into a single loan with an affordable monthly repayment.

Unsecured loan

As the name implies, an unsecured loan does not require the borrower to put up any security against it. People who opt for unsecured loans are usually those who aren't in a position to offer collateral (non home owners) or those with adverse credit records, county court judgments (CCJs), mortgage arrears, debt issues.

By their very nature, unsecured loans involve the lender taking more risk – for which the interest rate is increased. Although adverse credit records, CCJ's, mortgage arrears or debt issues are unlikely to affect the acceptance of an unsecured loan application, the better the applicant’s credit record, the better the loan terms offered.

An advantage of taking out an unsecured loan is that your application can be processed a lot quicker as there is no collateral to be valued.

A disadvantage is that it is harder to get approval for an unsecured loan. With no security on offer the lender must be more cautious. However, while a bad credit history will not necessarily bar you from an unsecured loan the interest rates will reflect the lender’s increased risk.

The risk will be reflected, too, in the lender’s tolerance of late payments. Without any collateral, the lender will be quicker to take legal action to recover missed instalments – and in such cases, the lender will usually demand repayment of the full amount borrowed plus interest plus legal costs incurred. In such cases, court proceedings could lead to your home being sold to raise the money. Therefore, it’s wise to ensure that you don’t bite off more than you can chew, repayment-wise, or the consequences could be dire.

Home equity loan

Since a homeowner loan or home equity loan is based on freeing up the value of your property it is only available if you own your home.

Some lenders will not grant a home equity loan unless your mortgage is fully repaid. Others are not so strict. Make enquiries before applying, though, to avoid wasting time and effort on the inevitable form-filling that accompanies every loan request!

This type of secured loan can be used not only for home improvements but also to cover such expenses as car purchase, a wedding or a holiday. The most common type of secured loan, it is a way of using some of the equity you have in your home for whatever purpose you need and often offers lower rates of interest than other loans.

There are three types of home equity release:

• Home income plans generate a monthly income from a loan, usually invested in an annuity, which pays not only the income but also the loan interest. For a guaranteed income it is necessary to choose a fixed interest rate. Note that you lose the money paid into an annuity when you die unless you arrange capital protection, in which case some of the annuity will be refunded. Such home income plans are generally restricted to people aged over 75.
  
• Loans or mortgages use the equity of your home to allow you to borrow a percentage of its value. You agree an interest rate on the loan and repay that over an agreed period. The loan itself is repaid when you sell the property or by your next of kin if you die. It is sometimes possible to get a roll-up loan on which you don’t repay any interest as this is added to the original loan. Be very careful with these, however, as the amount can accrue alarmingly quickly.
  
• Home reversion is an initiative under which you sell your home and receive a lump sum or regular income from the proceeds. You continue to live in the property in return for a nominal rent. However, these schemes should only be used as a last resort, because you will not receive the market value for your home.

YOUR HOME IS AT RISK IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR OTHER LOAN SECURED ON IT.