When are homeowner loans a useful option?
Homeowner loans are a kind of secured loan which give you greater access to credit than many of the alternatives. If you need to borrow money, there are a number of routes you could go down. At the simplest, your bank will offer an overdraft facility. This may not be much, but if you only need a few hundred pounds it could be enough. Borrowing cash on a credit card can be prohibitively expensive, although there may be more money available than on an overdraft. Unsecured loans can give you access to sums that stretch into five figures, subject to credit checks, and at a lower rate of interest than a credit card. However, since these are made with no collateral, they can be fairly difficult to obtain. The only factor involved in the lender’s decision is your credit history, which means that in certain cases you will simply not be approved.
The alternative is to take on some kind of secured debt, where the risk to the lender of you defaulting on the loan is offset by securing the money against a physical asset, such as a car or property. A homeowner loan puts your house up as collateral. If the worst comes to the worst, this means that the lender can take possession of your house and use it to repay the loan if you can no longer meet repayments. However, because this type of loan is inherently less risky, it means that you are far more likely to gain access to larger sums, and at better rates than for an unsecured loan.
How much do homeowner loans amount to?
Using your home as collateral frees the lender from worrying about the possibility of default. As a result the loan can be from £3,000 up to £50,000 or so – although some will offer you more, depending on various factors. If you own your house outright, they may be disposed to lend you more, although if you have a mortgage this does not mean you will be ineligible. Lenders still carry out standard credit checks and base their decision on factors including your income and any previous mortgage arrears or defaults on other debt.
Aside from the size of the sums available, there are other benefits to a homeowner loan. The term is likely to be longer than an unsecured loan – anything from three to twenty-five years. Repayments are typically monthly. The rates will usually be more favourable than unsecured debt, too, because lenders compensate for higher risk of default with higher rates. Of course, the lower rates mean that monthly repayments are also lower and you will be less likely to default in the first place.
Needless to say, homeowner loans come with warnings attached. Like any kind of secured loan, your collateral is at risk of repossession if you cannot meet repayments. And yet they need be no more risky than a regular mortgage. As such, they can be a good way to consolidate more expensive debt.
