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Secured Loans Primer
Filed under UncategorizedJul 20A secured loan is fundamentally a loan that is taken out against your home or other collateral. In the context of this guide, when speaking about secured loans and secured lending, reference is being made to that of a lender placing a legal charge over a property.
The most common type of secured loan is that of a mortgage. It is not within the financial capability of most people to buy a property outright so most of us will therefore require to secure a mortgage.
Again, in the context of this guide, when speaking about secured loans and secured lending, reference is being made to secondary secured loans, or second charges as they are often known within the industry. Borrowers who apply for a secured loan/second charge are doing so to follow that of their first mortgage.
How Do Secured Loans Work?
To the average lender, secured loans offer a appealing prospect. They can lend out giant sums of money with the additional security of a property – They will subsequently have open to them a few legal treatments in the event of the borrower defaulting there obligations and payments. This will of coursework include home repossession.
A lender will register a secured loan by way of a legal charge with which the applicant must give consent to in order for an application to complete. The charge is then registered at the Land Registry by the lenders solicitors.
When it comes to remortgaging, most secured lenders will require the outstanding balance to be redeemed simultaneously as the first mortgage. An exception to this is when a second charge lender grants a deed of postponement, thus allowing the existing second charge loan to run alongside that of the new mortgage lender.
What Are The Characteristics Of A Secured Loan?
The characteristics of a secured loan share plenty of similarities to that of a mortgage. The most common one being that if your do not keep up the repayments on the secured loan, your home may be repossessed.
In the case of taking out a secured loan, it is a common myth that your home will be safe as long as you meet the repayments on your first mortgage. This is not true. In case you fail to meet the repayments on your secured loan, even in case you are up to date on your mortgage, the lender can seek possession of your property through the courts.
Secured loans can be arranged on loan sizes that usually range from 5,000 to 250,000, depending on the lender. Flexible terms are also obtainable on secured lending, ranging from 5 up to 30 years. Some lenders will have schemes obtainable allowing you to borrow over the worth of your property (combined with that of your first mortgage) of up to 125%. These schemes are not common and it is believed that this is more of a promotion ploy than a viable or an advisable option to plenty of borrowers.
How Does A Debt Consolidation Secured Loan Work?
A debt consolidation secured loan allows borrowers with significant levels of debt to consolidate some or all of these outstanding commitments in to one loan amount and subsequently, one every month payment. Debt consolidation is seen by plenty of as an effective short term solution to relieving the pressures of debt.
It is highly likely that by arranging a secured loan to clear off other unsecured debts such as credit cards, personal loans and hire purchases, the borrower can accomplish a lower rate of interest than that applied to their unsecured commitments.
Not only will this take the effect of reducing the every month payments but also secured loans can be arranged over an extended term than that of their unsecured counterparts. By extending the term of the loan will also mean that lower every month payments can be achieved.
This is often viewed as a short term solution as in the long term, increasing the term of the debts may mean that you finish up paying more interest. The other potential disadvantage of these types of loans is that consolidated debts that were one time unsecured would then transform to being secured on the property.
What Are The Benefits Of A Secured Loan?
There’s lots of benefits to be realised in taking out a secured loan. Plenty of lenders and brokers similar won’t charge any upfront fees, house valuation costs or legal fees. Compared to the fees associated with a remortgage, the secured loan option can be a appealing one to borrowers.
Such fees associated with a remortgage will include valuation and administration fees, higher lending charges, discharge fees, title insurance and telegraphic transfer fees. This list is by no means exhaustive however they may not all be applicable in every case.
The timescales involved along with the various fees involved can be a put off for some homeowners thinking about a remortgage.
Perhaps the largest appeal to most householders who are seeking finance is the speed at which a secured loan application can complete. At the top finish of the scale, an application can take a matter of days to complete. However for all, five to five weeks is a sensible timeframe to look for.
The benefits of secured loans when looked at against comparable unsecured loans are that it is highly likely that you will receive a more favourable rate of interest on secured lending. As discussed earlier, this is due to the fact that the lender will in this case secure the loan by legal charge over the property reducing their perceived level of risk and subsequently reducing the rate of interest.
A secured loan will also offer a more flexible repayment period than that of an unsecured loan between 5 and 30 years with plenty of lenders. If it is the purpose of the borrower to receive the lowest every month payment then this might be giant benefit to them.
How Do I Know Whether I Ought to Take Out A Remortgage Or Secured Loan?
Each case must be assessed by itself merits. It is impossible to answer this query without cautious consideration and assessment of the borrowers circumstances, needs and objectives.
The obvious example would be where a borrower seeking finance has a giant early repayment charge to redeem their mortgage. In this case it may not be appropriate to remortgage. ERCs (Early repayment charges) can be as high as 7% of the outstanding mortgage balance which can of coursework lead to thousands of pounds.
By arranging a secured loan in this instance might mean that you would be paying a slightly higher rate than that of the mortgage, however it could potentially save thousands of pounds of charges.
Another example of when taking out a secured loan might be of more benefit to the borrower would be a case where the first mortgage was originally taken out before the individual began to miss payments or run up another kind of bad credit. It is highly likely in this instance that raising finance through a remortgage would mean paying a higher non-conforming/sub prime rate on the whole amount of borrowing.
By arranging a secured loan might mean that the borrower can still enjoy the prime high street rate applied to the first mortgage whilst only paying a higher non-conforming/sub prime rate on the new secured loan the additional finance.
Am I able to Apply For A Secured Loan With A Bad Credit History?
There’s lots of schemes obtainable today to cater for every type of borrower irrespective of credit history. If there is obtainable equity in your property and you can meet the affordability criteria then it is highly like that you will be eligible for a secured loan. Bad credit will usually be defined between having one or more of the following:
# Mortgage arrears
# Rental arrears
# Secured loan arrears
# County Court Judgements
# Individual voluntary arrangements
# Bankruptcy
The more extreme your credit history then the higher the rate of interest that you will be charged. This again is a reflection of the higher level of risk perceived by the lender.
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