Secured Loans: Common Questions, Answered

Charles Landa asked:

Secured loans can be an efficient short or long-term funding solution for UK homeowners. If you are in need of money and have equity in your property, you are eligible to apply for a secured loan. Secured loans are sometimes called “second mortgages” as they rank after your mortgage as security to the lender. Secured loans must be registered as a Charge on your property title at the Land Registry.

Why seek a secured loan rather than an unsecured loan?

The strong growth in UK house prices over recent years has meant that many homeowners have built up substantial equity in their properties. Secured loans are simply a flexible way for homeowners to release some of this equity. Compared with an unsecured loan, a secured loan has a lower interest rate as you are putting your home up as security. The lender will be very confident that the loan will be repaid. Another advantage is that secured loans offer more flexible terms of repayment than unsecured loans. For example, the loan term can be for a longer time period enabling your monthly repayments to be kept down. Secured loan terms can be from 3 to 25 years – it can sit alongside your mortgage if you wish or you can pay it off sooner. If you’re in need of a large sum of money, a secured homeowner loan can range from £5,000 up to £1 million. Unsecured loans are normally capped at £25,000.

What can I use a secured loan for?

A secured loan can be used for any purpose. A secured debt consolidation loan can help you refinance expensive debt, such as credit cards or bank overdrafts, on to a much lower interest rate. A secured home loan can be used to finance substantial home improvements to add value to your property, such as an extension or a new kitchen.

Why choose a homeowner loan rather than a remortgage?

A mortgage is your cheapest form of borrowing and if you want to raise a significant amount of money it is therefore logical that you should first consider a remortgage. However, your current mortgage may be arranged on advantageous terms or have an onerous early redemption fee. Redeeming your mortgage may just not make financial sense. In these circumstances it may be wise to leave your mortgage alone and use the flexibility of a secured loan, especially if the interest rate is only a little higher than your mortgage rate. Finally, a secured loan can be completed in less than 20 days – somewhat faster than a remortgage – and at a lower cost. Remortgaging normally requires that you pay certain fees, such as a discharge fee, a valuation fee, a title insurance fee or an administration fee.

Can I safeguard my loan or mortgage payments against unforeseen events?

You can take out payment protection against specific events, such as unemployment, sickness or disability through Payment Protection Insurance (PPI). Remember that PPI is not always suitable for your individual circumstances and independent advice should always be sought before buying this product. Should the insured event take place, the policy will cover your payments for a fixed period of time, such as 12 months. You should also consider buying sufficient life assurance such that in the event of the death of the household’s main bread-winner, the loan or mortgage will be paid off by the insurance company.

How can I apply for a secured loan?

You have the choice of going direct to the lender or going to an intermediary, usually a finance broker. If you have shopped around and know what you want, you can apply direct to the lender via phone, internet, post or walk into their branch office. If you prefer to seek the advice of a finance broker you may benefit from their expertise in deciding what product and which lender is most suitable for you. This will be particularly true if your circumstances are unusual and you require a specialist product. It is also possible that a finance broker can find you a better deal as some products are only available through intermediaries.

How long does the secured loan application process take?

Depending on circumstances and personal needs, you may obtain a secured loan within 2-4 weeks. But, of course, each case is different. Normally, the consent of the first mortgage lender is required to register the secured loan on your property title and so the lender is unlikely to proceed before consent is obtained.

What factors may negatively influence the secured loan application?

When you apply for a loan it is normal that you will be asked to consent to a search at a Credit Reference Agency, such as Experian or Equifax. The purpose is to avoid fraud and for the lender to assess your credit worthiness. Some factors may have an adverse effect on the secured loan application, such as:

Bankruptcy or Individual Voluntary Arrangement

Low income or self-certification of income

Mortgage or rental arrears

Frequent job changes

Frequent address changes

High indebtedness

Court judgments

But even with a poor credit record, you have a good chance of obtaining a secured loan providing you have plenty of equity in your property. However, you may be asked to pay a higher interest rate if your credit score is low.

Is it important to seek independent, impartial advice?

There are literally thousands of loan and mortgage products available. As we only tend to purchase financial products infrequently, you will not know which products are available or suitable without a serious research effort. For this reason, we believe that most people should seek independent, impartial advice, especially as mortgages and secured loans normally represent a substantial commitment. This should not cost you any more as the advisor is normally paid directly by the lender.

What are the drawbacks of a secured loan?

Although there are many benefits of a secured loan, there are some drawbacks that should be mentioned. In cases where a borrower fails to repay a loan, the property could be taken into possession and sold. Borrowers can also be tempted to borrow large sums for long periods without appreciating the commitment to repay a significant amount of interest, even when interest rates are low.

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