Secured loans are loans only available to property owners (or mortgage holders). The lender can forcibly sell your house to get their money back if you're unable to repay. The 'secured' means the lender gets 'security' not you, as if there are problems, it can repossess your home.
Personal loans from a bank or building society are unsecured, which means there's no automatic link to your home (so non-homeowners can borrow this way too).
Sadly it is becoming more common that for those in financial distress even unsecured lenders can get what's called a 'charging order' on your home. This effectively means they have a call on the money from the sale of your house.
This doesn’t automatically mean it move for repossession though, there’s another court stage they’d need to go for and the courts are much more reluctant to grant it on charging orders. Yet even with this, it's much more difficult for lenders to take your home if its unsecured.
Unsecured loan is always preferable to a secured loan
.
Advantages of a secured loan?
Easier to obtain
Unsecured loans are almost always cheaper for those with decent credit scores, but secured loans provide lenders with, well… security, so they're more willing to lend to poor credit scorers.
Huge borrowing is possible
Maximum unsecured loan is £35,000 yet secured loans can be £75,000.
You can borrow over a longer period
Secured lenders require loans to last longer to help offset hefty set-up costs, usually from five to 20 years. Unsecured lending is between one to seven years. Borrowing for longer does reduce the monthly repayments, but substantially increases the total interest repaid.
Things to consider before considering a secured loan
Credit card balance transfers
Credit cards are ‘unsecured' and, used correctly, the cheapest borrowing possible and less risky, especially when shifting debt to new Balance Transfer Credit Card offers.
Check credit reference files
Those rejected from unsecured lending with good credit history should check their information held by the credit reference agencies Equifax,CallCredit and Experian isn't erroneous.
Use savings
Interest paid on savings is usually far less than interest charged on borrowing.
Credit card shuffle
It's possible to cut the interest rate on existing debts even without getting new products. Most credit cards allow existing customers to move other debts to them at special rates. Correctly shifting balances and prioritising repaying expensive debts first creates substantial savings.
Budget & reduce outgoings
Massive money saving is possible on everyday spending by moving to better products. Budget effectively to allow quicker and easier debt repayments with the Budget Planner
.
Remortgage
Mortgages are simply a special type of secured loan with cheaper rates. Borrowing the money on your existing mortgage, or remortgaging to a new cheaper deal is a valid option, but isn't always correct. Mortgage debts are paid off over a long time, and 5% over 20 years is more expensive than 10% over five years. Plus you may be forced to increase your life assurance and other associated costs if mortgage debts increase.
Those without flexible mortgages (which allow quick repayments) may sometimes be better off with a secured loan.
Debt counselling
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Simi Fubara Biography and Net Worth
For those consistently struggling with debts and meeting repayments, free personal help is invaluable. Do it as quickly as possible, the longer you leave it the worse it gets. Don't use commercial debt management companies.
The following charity based bodies offer awesome services,National Debtline, StepChange, Citizens Advice Bureau and the Community Legal Advice and if you are considering taking out an IVA or any other formal debt resolution scheme,
How to get a secured loan cheaply and safely
How much should you borrow?
Get hold of your existing debts first; list them on a piece of paper. Once you know the secured loan rate, draw a line across the page where this fits in. The secured loan should only be considered to pay off the more expensive debts above the line.
Don't feel all debts should be consolidated into one. This is a common secured loan sales pitch, yet in isolation it serves no real purpose. If you're repaying a higher rate or for longer, your lender makes more cash, you don't make savings.
You're converting a fixed rate into variable rate debt
If you're considering converting fixed rate debt such as a standard personal loan into variable rate debt, always ask “could I afford the repayments if rates increased?”. If not, don't do it. Don't throw surety away. Some secured loans offer rate fixes, but usually only for a limited period; and do always check there are no penalties for paying off your existing debts early, something common with unsecured loans.
Most importantly, don't borrow more than you need. Disgustingly some lenders tout, “why not borrow a little more for a holiday? You deserve it.” Don't do it. Never treat secured loans lightly, take as small lending as possible.
And most importantly if you think you won't be able to make the repayments, don't even start down this route, it isn't worth it.
How long to borrow for?
Work out the maximum realistic amount you can commit to repaying. Don't underestimate or it'll take longer to repay, costing more interest; and don't overestimate or you may overstretch yourself, risking your home. Careful planning is crucial.
How much does it cost?
What the rate depends on
The interest rate depends on the loan size, length, your ‘credit score' and the ‘free equity' in your home. Lenders assess these factors in different ways. One may be cheapest for good credit scorers with limited equity but uncompetitive for poor credit scorers with high equity.
Your credit score depends on a range of factors, the most important are income and outstanding debts, arrears (being behind in repayments), defaults (failing to make repayments), County Court Judgements or CCJs (where repayment failures have been taken to court) or bankruptcy (a legal judgement relieving a person of all past debt commitments).
‘Free equity' is the difference between a property's value, and the amount owed on it. The bigger the difference, the better rate you'll be offered. Sadly recent house price falls mean many people can now have low ‘free equity' in their homes.
Comparing the price
All costs should be paid by the lender and included in the interest rate (APR), including the initial valuation and legal fees.
The exception is Payment Protection Insurance (PPI), which covers repayments in the event of accident, sickness and unemployment (often for a limited time). Lenders' interest rates don't include the cost of the insurance and providers often make a bundle on PPI. Those who want PPI should compare based on the total cost (total monthly repayment times the loan length in months) not the APR.
Finding the best deal
Ask your existing mortgage lender for advice
Many offer special terms for those with good mortgage repayment records. It won't always be cheapest, but it's a good benchmark for comparing others against.
Internet price comparisons
There are a number of free secured loan price comparison websites. Enter loan, credit and home details and they'll publish the cheapest lenders. You can use MoneySupermarket*. It gets paid a lead fee if you then click through to a lender. Be careful, though, the quote may include PPI insurance.
Non-Internet Users
Finding the best deal is a substantial undertaking, which using the web makes easier and quicker. If possible, find someone web-savvy and ask them to access the sites above to get the general prices, then call up the cheapest providers directly. (If you're wondering why I've included offline' options here,
Those with poor credit scores or little free equity might not be able to find a secured loan cheaper than existing debts. If you're struggling, again I'd refer you towards the free debt counselling services
Repaying early?
This can be costly. Secured loans are not flexible and overpaying to clear the debt quicker usually isn't allowed. If you come into some money and can pay off the whole loan, you should only pay interest for the loan up to that date, not the original loan period – lenders present this as a virtue, it isn't, it's a minimum expectation. However, there are early repayment penalties. Weigh your options carefully.
Redemption penalties:
These are fines if you try and pay off the loan early. This used to be a major problem as these penalties are stringent, and for many with existing secured loans sadly they're still in force.
Yet for new loans of less than £25,000, redemption penalties are legally restricted to only two months' worth of interest. Larger amounts have no maximum limit however, and penalties can be much heftier. Many loans have settlement figures of up to 6 months interest for the first few years, then on a sliding scale after this.
Rule of 78:
For loans of under £25,000 a potential hidden penalty used to come from ‘rule of 78' interest calculations, a complicated formula which artificially allocates repayments towards interest not capital, leaving more left to repay than you think. Repay very soon after borrowing and it can mean paying back more than you borrowed.
Thankfully the government has banned rule of 78 charges, however most people with loans taken out before that will be caught by this.
The size of the saving
Someone with £15,000 debts averaging 17% and repaying £300 a month would take six years, nine months to repay. Assuming one CCJ, so standard new credit isn't available, just calling any advertised secured lender you could pay 16.9%.
However, using price comparison services, it's possible to find a 9.9% secured loan over six years, reducing the monthly repayments and paying the debt off more quickly, with total interest costing only £4,700, less than half the cost.
£15,000 credit card debit for someone with one CCJ
The worst that could happen with secured loans?
You can lose your home! However, thankfully, it is less profitable for most legit secured loan lenders to repossess homes than have the debt repaid. If you may not be able to make a payment, or you get behind with repayments notify the lender immediately. It maybe possible to renegotiate the repayment schedule with them.
Failure to repay affect your credit score negatively, plus lenders' letters informing of arrears are often charged for, added to your account with interest, effectively a missed repayment penalty. At this point again consider talking to the free debt counselling agencies.
If all fails, the lender will repossess your house, petitioning the court to demonstrate you've been unreasonable; refused to sign letters or pay your newer repayment schedule. After that it'll empty the property from you, your family and your possessions, sell the property (probably at a low price for a quick sale) take what it's owed and its costs and give you the leftovers (if any) and what if the amount realised is far lower than the debt? Well we'll answer that question in our next post.
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