Secured loans are available to homeowners only, and as such they are often referred
to “homeowner loans”. This type of loan requires you, the borrower, to provide
the lender with some form of security, and in the majority of cases this will be your
home - meaning that your home may be at risk if you miss repayments. As the lender
has security for the loan, sometimes a secured loan may be offered at a lower rate
than an unsecured personal loan.
As secured loans are usually available for larger amounts and over longer repayment periods,
people often find they are ideal for larger purchases, debt consolidation and significant
home improvements.
Typically the amount available as a secured loan ranges from £3,000-£100,000
although some lenders may offer loans of much larger amounts depending on the circumstances.
When you take out a secured loan you will sign a credit agreement that outlines the amount
borrowed, the interest rate, the amount of interest charged and the total amount repayable.
It will also state your repayment terms i.e. your monthly payment along with the term of
the loan, in years and months. Secured loans are usually based over a term of between 3
and 25 years, but remember that the repayment term will have a direct impact on the total
amount repayable and the amount of interest charged i.e. the longer the repayment term,
the higher the total amount repayable will be. In practice, although most secured loans
are taken over a long period, most people often repay the loan much quicker, either by
remortgaging, moving house or obtaining funds from elsewhere. Recent changes to the
Consumer Credit Act (CCA) has seen the maximum early repayment charge for secured loans
being capped at 1 months' interest as long as 1 months’ written notice is provided, or
2 months' interest if no notice is given.
Because a homeowner loan is secured against your property, in a similar way to your mortgage,
missing repayments could not only have a negative effect on your credit rating but could,
as a last resort, potentially result in your home being repossessed by the lender.
To find a competitive secured loan deal it's best to compare rates - the interest
charged is the key thing to look for. All loans and credit cards must be expressed as an
annual percentage rate (APR) to enable you to compare like with like - the higher
the APR the more you may pay in interest. The majority of APRs advertised will show
“typical rates” - this means that at least 66 percent of successful applicants
must receive the typical rate or below. The remainder could be offered a different interest
rate, depending on their individual circumstances and the plans on offer from the lender.
The APR you are offered, along with the amount you are allowed to borrow, will be determined
by a number of factors. Firstly lenders will take into account the equity in your home,
most lenders will only work to certain Loan To Value (LTV) levels, in other words they
will only allow you to borrow up to a certain percentage of your property's value including
your current mortgage balance. Then they may look at the risk of you defaulting on any
repayments - known as “risk based pricing”. A lender may make a judgment on
your likelihood to default based on your credit profile, payment history and employment
status - the better your circumstances the lower your interest rate is likely to be.
Broadly, there are three types of secured loans to choose from:
-
Short term fixed rate loans. You pay a fixed amount every month
throughout the short term of the fixed rate (usually between 1 to 5 years), your
repayments will then revert to the lenders standard variable rate, meaning your
payments may then go up or down.
-
Fixed for term loans. You pay a fixed amount every month throughout
the term of the loan, giving you peace of mind that your repayments will not fluctuate,
and the ability to budget your outgoings.
-
Variable rate loans. The interest rate you pay may fluctuate dependent
on the Bank of England base rate or market forces. This means that your monthly
repayments and the total amount you repay over the term could increase or decrease.
If interest rates go up, you could repay a lot more than you originally budgeted for
or, worse case scenario, be unable to meet your repayments.
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When shopping around for a secured loan you should compare the APR of each product to find
out how competitive each deal is. However, there may be additional considerations:
-
Early repayment fees. Some lenders may charge a penalty if you repay
the loan early (because they will not be earning the interest they expected). The fee
will vary between lenders and products.
-
Other fees. Check the terms and conditions thoroughly for other
fees, such as arrangement fees.
-
Payment protection insurance (PPI). This is an insurance product
that could help cover your repayments if you can't work due to an accident,
illness or involuntary unemployment. It can be beneficial but it can be expensive
when sold alongside a loan. It is not compulsory and you may prefer to shop around
for a stand-alone deal. Always check that you are eligible for any cover offered
before you accept it.
-
Payment breaks/deferment periods. Some lenders may offer
“payment holidays”. While these can be beneficial if finances are tight,
bear in mind that interest will continue to be charged meaning that the total
amount repayable may increase.
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Usually, when people require a loan of more than £15,000 they opt to down this
route. Lenders tend to be reluctant to provide more than this amount without some
form of security. Generally, secured loans may be easier to obtain than personal
loans due to the security required by the lender. This could make them better suited
to people with less than excellent credit profiles, the self-employed and those
who may have been turned down elsewhere.
Some people choose secured loans for the purposes of debt consolidation i.e. to pay
off all their outstanding debts, such as credit cards, store cards and hire purchase
agreements. This can help them to ease their cashflow by rearranging their outgoings
into one easier to manage, often lower, monthly repayment. By consolidating your debts
into a secured loan, you could reduce the amount you repay each month, or you could
control the length of time over which you will clear your debts. Reducing the amount
you spend repaying your debts each month may mean that you repay the total debt over
a longer period - so always remember that this option could cost you more in the
long run.
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 LOAN
SECURED ON IT.
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