When someone is looking for additional funding for whatever purpose, whether it is business related, for a new purchase such as a car or a holiday, or simply a debt consolidation loan to tidy up a person’s finances and make the monthly budgeting plan easier to manage with one single repayment, there are a wide range of options available on the market place, not only from a large number of different providers all trying to compete against each other to offer the best rates, but also a wide variety and choice of alternative funding options, from overdrafts, credit cards, hire purchase agreements, mortgages or homeowner loans, unsecured loans and secured loans.
Each alternative has its advantages as well as its disadvantages and it can be quite a minefield for someone who may be looking for a new loan to have to wade through all the various options. In the majority of cases it can be beneficial to seek professional advice from an independent financial adviser (IFA) or a loan broker, who will be able to help you get the right type of funding for what you require. In this article we are only going to look at one particular option for a loan, that is a secured loan.
As the name suggests, a secured loan is one which takes some form of security for the loan, which may be called on in the situation where the lender has to call in the loan if the borrower should default on his or her repayments. This would be done by repossessing the property in question, which would then be sold on by the lender in order to get their money back. Therefore, when we talk about a secured loan, the security is there for the benefit of the lending organisation, not the person who is applying for the loan. In the majority of cases, the security to be used is the borrower’s home, but it could actually be any asset owned by the applicant, such as an investment, a second house, a car, or even a work of art, for example
As we have already said, in the majority of cases, a secured loan uses the borrower’s main home as the security for the loan. Most individuals who apply for a secured loan already have an outstanding mortgage, or homeowner loan on their property. A secured loan takes advantage of the equity which is held in the property, that is the difference between the value of the house and the balance on the existing loan.
In most cases, the maximum loan to value ratio which is allowed across all loans is around 80 or 85 per cent, but there are some lenders who will allow more than this (very few in the current economic conditions), whilst other lenders may limit the maximum loan to value as low as 65 or 75 per cent. As the loan to value ratio increases, so does the level of risk for the lender and therefore usually the interest rate charged will be higher, along with the lending criteria being tougher.
The main mortgage or homeowner loan on the property takes what is known as a first legal charge on the property, with a subsequent secured loan taking a second charge. In the case of the borrower defaulting on the loans and the property being repossessed, the first charge loan would take priority when it comes to getting paid out, with the second charge loan depending on there being sufficient equity from the sale proceeds. As this poses a higher risk for the secured loan provider, the interest rates on secured loans are invariably higher than those of a typical mortgage.
It is possible to take a secured loan out on a third or even fourth charge basis, depending on the amount of available equity, but these are extremely rare.
As with any other type of finance, there are advantages and disadvantages with a secured loan. On the positive side, secured loans are generally readily available through a number of routes. Most banks and building societies offer them, as do centrally based loan and finance companies. Loan brokers and intermediaries usually have access to either the whole of the loan market , or a selected range of providers and therefore this can be an advantage when sourcing the best loan.
As the loan takes security out against the borrower’s property, the risk on a secured loan is far less than that on an unsecured loan, making it a relatively cheap option. Likewise, due to the additional security of a secured loan, it is possible to borrow much larger sums of money than it is with alternative funding options and the loan is able to be taken out over a much longer period than the usual four or five years of an unsecured loan, often with terms of anything up to 25 years, thereby significantly reducing the amount of the monthly repayment.
A potential borrower who has a less than perfect credit history will stand a better chance of being accepted for a secured loan, once again due to the increased security for the lender, although they are still likely to have to pay a higher interest rate and be limited to a lower loan to value ratio than someone with a good track record.
On the down side, as the secured loan uses the applicant’s property as security for the loan, the borrower must be a homeowner. A tenant, or somebody living with their family for example will not be eligible for a secured loan and will need to seek alternative funding elsewhere. It is also possible for the borrower to have their property repossessed if they should fall behind with their repayments and default on a secured loan and as a result of this, all secured loan documentation contains the warning “your home is at risk if you do not keep up repayments on your mortgage or other loan secured on it.” Although taking a secured loan out over a long term of years has the advantage of reducing the monthly repayments, overall interest will be paid for a much longer period than with an unsecured loan and therefore the total cost will be much higher.
Following the recent credit crunch and the general economic slow down in the UK, there has been a significant reluctance on the part of lenders to offer loans of any kind to borrowers, however good their credit history may be. As secured loans depend on the value of the borrower’s home and with property prices falling in the UK over the past couple of years, many lenders have either withdrawn their loan products from the market place altogether, or severely restricted the maximum loan to value ratio they will allow in order to avoid borrowers entering a negative equity situation.
But as property prices are slowly starting to show some signs of growth over the past couple of months, hopefully this will feed through to the secured loan market and we will see some new, more competitive products appearing from lenders.
Finally, the advice for anybody who may be considering taking out a loan of any kind is to think carefully before you borrow. It can be expensive and take a long time to repay any money which has been borrowed, therefore only borrow the minimum amount you require and don’t be persuaded to go for the maximum amount which you may be eligible for.
Also, unless you are extremely confident and knowledgeable about the loan product you are looking for, it can save a lot of time and, in the long term also a lot of money, to take advice from a professional adviser such as an IFA or loan broker, who is able to offer advice on the best options for your particular needs as well as source the cheapest loan from the whole of the loan market.
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