If you're thinking about applying for a secured loan, it's a good idea to make sure it's the right fit for your plans. By taking out this type of loan, you are putting your property at risk, so you need to be sure it is affordable and suitable.
In this blog, we will help you understand the process to go through to find the best secured loan for your needs.
Step 1: Understand your financial position
Before you start comparing options, have a proper look at your finances. Knowing exactly where you stand will help you work out what you can afford.
- Credit score: Your credit history plays a big role in what loan you may be offered. A better credit score can open up lower interest rates and more favourable terms. However, if your credit score needs some work, the offers may not be as attractive. Therefore, it may be worth taking some time to improve it before applying if you want to get a better deal.
- Income: Lenders want to know you can comfortably afford the repayments, as they need to recover their costs. So, they will look at not just your salary, but also any other sources of income you have. If they have any doubts on your ability to afford the loan, they may not let you borrow the full amount, or they may reject your application.
- Current debts: If you’ve already got other loans or credit commitments, lenders will factor these into their decision. Being in a high level of debt may affect how much you can borrow, or even whether your application is approved. If you don’t have much debt, you may have a better chance of getting accepted.
Step 2: Decide on the loan amount needed
It may sound obvious, but knowing exactly how much you need can make a difference. The last thing you want is to have a shortfall or be borrowing more than you need.
So, start by outlining what you’ll use the money for and how much you exactly need. It’s important to be specific, as lenders will want to know exactly what the money is being used for.
Step 3: Get your documents ready
Next, get your paperwork ready. This can help speed up the application process, which can be useful if you need the money quickly. The documents needed can vary by lender, but here's what you may need:
- Proof of ID: A valid driving licence or passport. Many lenders will now accept eID, which is an electronic form of identification.
- Proof of address: Utility bills or bank statements from the last three months.
- Proof of income: If you’re employed, this will usually be payslips from the last three to six months. However, if you're self-employed, you may need to show recent tax returns and bank statements.
- Proof of home ownership: This could be your latest mortgage statement or a copy of the title deeds.
- Bank statements: Lenders will want to see how you manage your money day to day.
- Details of existing credit: Having a clear list of your current debts will help lenders assess your affordability.
Find out more in our blog on what documents are needed for a secured loan.
Step 4: Research lenders and compare rates
Once you have a plan, you can start looking into lenders. Not all lenders are the same, so they may offer different rates, terms, and features. Therefore, it’s worth taking the time to compare them.
However, comparing lenders is about more than just the headline interest rate. Look at the full picture such as: terms, flexibility, customer service, and any extra fees involved. If you’re unsure, consider working with a broker who can search across multiple providers for you.
Remember: the cheapest deal isn’t always the best fit for you. A slightly higher rate with more flexible terms or a quicker turnaround time might actually suit your needs better.
Step 5: Look closely at the loan terms
Before choosing a lender, take the time to look into the details of what’s being offered.
- Interest rate: Is it fixed for the life of the loan, or could it go up? Fixed rates may offer you peace of mind, while variable rates might be cheaper upfront but could be riskier long term.
- Repayment period: Longer terms can reduce monthly payments but may mean you pay more overall in interest. Whereas, shorter terms might save you money but it could put more pressure on your budget.
- Fees and charges: Look out for arrangement fees, valuation fees, and early repayment charges. These can add up quickly and may affect the overall cost.
- Loan-to-value: This is the amount you’re borrowing compared to the value of your property. A lower LTV ratio typically leads to better rates, so if you’ve built up a lot of equity, you may be in a stronger position.
Step 6: Apply and go through the approval process
Once you’ve chosen a lender and are sure the loan works for you, it’s time to apply.
Here’s what usually happens:
- You fill in your personal and financial details. This could be online or over the phone, depending on how the provider works.
- The lender carries out a credit check and affordability assessment.
- Your property may be valued to confirm how much it’s worth. This could be a physical inspection or a desktop valuation.
- The lender reviews everything and gives you a decision. This could take a few days depending on the complexity of your situation and how busy the lender is.
It’s important to make sure you are honest and thorough in your application. If you miss any information or give incorrect details, it could slow things down or lead to rejection.
Step 7. Read the loan agreement carefully
When you receive your loan offer, don’t feel like you need to rush to sign it. Typically, you’ll be given a reflection period, which is usually 7 days. Use this time to read the full agreement, including the small print. Make sure you understand exactly what you are getting yourself into.
Check things like:
- The interest rate and whether it’s fixed or variable.
- The repayment schedule and whether it fits into your monthly budget.
- Any fees, penalties or conditions tied to early repayment or missing repayments.
- What happens if you miss a payment or fall behind on your repayments.
If you’re not sure about anything, don’t be afraid to ask your lender questions. Understanding the loan terms now could save you from making the wrong decision or help you avoid making costly mistakes.
Step 8. Understand the risks involved
With this type of loan, your home is used as security. This means if you can’t keep up with repayments, your property could be at risk of repossession.
While there are some benefits to using your home as security, there are risks you need to be comfortable with. So, make sure you consider this carefully before you commit.
Step 9. Consider speaking to an expert
Getting any type of loan can be overwhelming, so if you’re unsure, it might be worth speaking to a professional. A financial advisor or broker may be able to offer you advice, explain your options, and help guide you to a solution.
Summary
Getting a secured loan may be useful if you need to borrow extra money for different needs. However, like any major financial decision, you need to make sure you have a clear plan and have a good understanding of the risks involved. The steps above may help to guide you through the process and help you make an informed choice.
Loans are secured against property - Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.
