Friday, September 24, 2010

Guide to Secured Loans

A loan that is supported by the borrower's home to decrease the risk assumed by the lender are secured loans. The borrower's home may be forfeited to the lender if the borrower fails to make the necessary payments. This way, risk is involved for the borrower in a secured loan deal but only these loans can fetch heavy amount at low interest rates for a prolonged loan tenure, with flexible repayment options. These loans work well for funding major financial needs like buying a house, investing in property or business, child's higher education, etc.

The decision of the borrower to grant you secured loans depend on the following:
  • The home equity i.e. the value of the property pledged
  • Creditworthiness of the borrower i.e. his ability to repay
  • The personal circumstances of the borrower
  • The annual income of the household to find the affordability
  • Other loans and mortgages (if any) against the house
How is the loan amount on secured loans calculated?

Secured loans are granted on the basis of the home equity. Equity basically refers to the ownership. To define, it is the market value of your house minus all the debts taken against the home. The debts may be the first, second charges (mortgages) or other secured loans. For instance, if the market value of your house is £35,000 and the outstanding debts incurred by pledging it amount to £13,000, the equity of the house comes out to be £22,000 (£35,000-£13,000). This is the eligibility of the borrower. However, inmost cases, the lenders grant 90% of the home equity keeping in mind unforeseen events like depreciation due to loss by fire, fall in house prices, etc. So, in the above stated case, the amount that a lender may grant comes out to be £19,800.


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