When taking out a general loan to buy a car, or finance some other venture, consumers are often asked whether or not they want to take out a secured loan. This decision is one that will have an impact on the borrower's monthly finances for years after and, therefore, it is crucial that they make the right choice.

Background

A secured loan is, as the name suggests, taken out on the proviso that the borrower can offer some kind of surety against their debt.

Usually this means that the borrower will secure the loan against their home, or some other tangible asset of high-worth.

This gives the lender the security that, should the borrow default on their payments or hit hard financial times, they have a way of recouping the funds leant.

According to Credit Action, at the end of January 2008 total secured loans against homes stood at £1,187 billion, which is a 9.7 per cent increase compared with the same month in 2007, indicating the popularity of this kind of loan in the current environment.

Borrowers repay their debt on a monthly basis, usually over a ten to 25-year-period, depending on how much was borrowed.

Pros

The reason people take the plunge and put their property on the line is that by doing so they can secure a lower rate of interest on the loan.

In the current climate, this may be a substantial advantage .

According to comparison website Moneyfacts, 27 changes have been made to personal loan products so far this year alone.

Samantha Owens, head of personal finance at Moneyfacts.co.uk, said: "Anyone who takes out a £5,000 personal loan over three years will find themselves paying up to £386 more than if they had taken out the same loan at the same time last year."

Furthermore, when taking out a loan against assets it is easier to wield a larger amount of money from the lender, as the bank sees this kind of borrower as a safer bet.

Cons

Should the borrower's financial circumstances take a turn for the worse then they could find themselves up the creek without a paddle…or a home.

In the first instance of non-payment, the borrower may incur a penalty from the bank.

If non-payment continues then the bank will most-likely remind the borrower that their home will be at risk if they fail to keep up with repayments.

Should the borrower be unable to continue with the repayment then their home, or whatever asset the loan was secured against, will be acquired by the lender.

On the other hand, should the borrower's finances improve they may find that repaying their loan in full before the agreed term is up will cost them dear.

Banks do not like customers paying off their debts too soon - it loses them money.

What to consider when taking out a secured loan

According to David Kuo, head of personal at popular financial finance at fool.co.uk, the main thing consumers should consider is the flexibility of the loan they are being offered.

He advises: "The option of flexibility will allow a borrower to repay a loan earlier and cut the total cost of the loan.

"It is also important to evaluate products by comparing the Total Amount Repayable rather than the Annual Percentage Rate."