Home loans | Debt consolidation | Secured loans | Homeowner loan

What is a Secured Loan?

A secured loan is a loan agreement in which the borrower pledges their property as security for the full repayment of the loan; hence secured loans are also known as secured homeowner loans, or homeowner secured loans.

Homeowner secured loans are also referred to as second charge loans or second charge lending. Whenever credit is secured on a property, a charge is registered at the Land Registry. Your mortgage lender will have the first charge on your property; the secured loan will have the second charge on your property.

Some reasons to consider secured loans are:

• secured homeowner loans for home improvements or other lifestyle improvements
• simpler and more cost effective replacement of having to re-mortgage when releasing home equity
  
• debt consolidation to help spread out and reduce monthly loan repayments for better affordability
• secured loans for UK small businesses find an additional cash injection in growing a successful businesses
• secured loans for self-employed UK residents to assist in capital asset expansion

A secured loan can also be seen as a cheaper type of re-mortgage. In that, the borrower can extend their debt amount set against their home property without the need to add to their current mortgage. This means that borrowers do not need to risk payment of any early redemption charges if they wish to free up some of their equity held in their property.

Advantages of Secured Loans

Generally, secured loans are much easier to obtain than unsecured loans. This is because the lender has the added benefit of security, which provides protection in the event of a customer’s inability to repay. This also means that persons who are self-employed, or who have recently changed jobs, or who have adverse or bad credit can take out a loan. They are also useful for larger amounts or where the applicant requires a longer repayment period.

Secured homeowner loans can be used for any purpose and are available to virtually anyone who has some equity in their property, with common reasons for taking out a secured loan for home improvements, debt consolidation or a special purchase.

At some point most homeowners find that they need to raise capital, it could be for home improvements, to consolidate some existing debts or to raise money for a dream holiday or a special purchase. Quite often moving your mortgage or borrowing additional money from your existing mortgage provider is not an option; that’s where a secured loan can really help.

Fixed term mortgage holders should opt for a secured loan to help bypass redemption charges. Redemption penalties affect homeowners who want to free up capital from their properties before their fixed term mortgage is up.

Secured loans allow borrowers to arrange sums from £7,500 to over £100,000 while most unsecured loans only allow the borrower up to £25,000.

Secured loans can also save the borrower a sum of money in the longer term. For example, a client borrowing £25,000 over 25 years who re-mortgages would be landed with a total amount payable of £49,197 – based on borrowing at a fixed rate of 6.19%.

However, that same £25,000 borrowed over 10 years as a secured loan would equate to a total amount payable of £36,398 based on 8.0% APR – this gives a saving of nearly £13,000 over the loan period.

With something as valuable as your property at stake; lenders know that you are likely to stick to the agreement. Add in the extra financial security provided by your property and it’s easy to see why lenders regard you as low risk. As a result you can expect interest rates one or two points lower than with an unsecured loan, you can borrow greater amounts; anything up to 125% of the equity in your property, and you can spread the loan over a longer term.

If you have just purchased your council property on a right to buy basis, you may be able to take out a secured loan as soon a 6 months after the purchase has completed.

Disadvantages of Secured Loans

The main disadvantage of a secured loan is the attendant risk of losing your property. You need to be absolutely sure that you understand the terms and conditions of the agreement and that you can meet loan repayments. If you find yourself in financial trouble most lenders will be sympathetic and do everything that they can to help reschedule repayments. After all, the last thing they want is to face a lengthy court case incurring hefty legal fees. However, its important to understand that your property is at risk. If the borrower continually defaults on loan repayments, the lender may take action to reclaim the debt including selling the property.

Should I take out a Secured Loan?

Before you take out a secured loan, think carefully about what you need it for. Secured loans can make astute financial sense in the right circumstances, for example: if you want to consolidate a number of smaller expensive debts, such as credit cards, into a single monthly payment.

However, if you intend to use the loan for purchase, such as a new car or holiday, it would be wiser to start saving.

There is a convincing argument for arranging a secured loan to pay for home improvements; as this will add value to your property. However, any pay-back will be in the long-term and depends on the buoyancy of the property market.

If you are in too much debt, and you can’t pay off this debt in the short term, then you need to try to reduce the amount of high-interest unsecured debt you have. There is little point in having to pay the high interest rates that store cards, credit cards and some personal loans charge annually. In most circumstances, you are better to convert this debt to a secured loan were you can decide your exact repayment time period and how much its monthly payments are that you can realistically afford to repay. Adding debt onto your mortgage will mean that you are paying of this additional debt over the life of the mortgage and accumulating more interest costs.

An overview of the the wide variety of credit verses loan interest rate levels can be seen in the diagram below.

Credit cards & personal loans on the left normally demand higher interest rate charges - whereas secured loans on the right provide lower interest rate charges.

Solutions to Control Debt

To explain the difference between secured loans and unsecured (personal) debt, let’s say we have a 40 year old family man with positive equity in his home (where their home is worth more than the current mortgage on this property). This person has overspent during the last few years (where they have spent more than their incomes would normally allow). They have accumulated debts on their credit cards, taken out a small personal loan and each month their bank account goes into overdraft before being paid. Their total outgoings (mortgage, debt payments and cost of living) now exceed their total income and they are struggling to make ends meet.

This person can take one or more of the following options:

1. Get more income to help pay off the rising debts - such as a better paid job

2. Reduce their monthly outgoings: re-mortgage to reduce monthly payments by extending the length the mortgage, or reduce their cost of living to help pay off their debt

3. Manage their debt through debt consolidation by securing a new loan to pay off their all their short-term unsecured debts (credit cards, store cards and personal loans) - this is where a taking out a secured loan is a solution.

4. Release some of their equity in the house, such as downsize to a smaller, cheaper house and pay off their debt, or sell some other assets, such as a car, or even take out a higher mortgage

5. If none of the options above are available, seek professional advice as you may go insolvent or face bankruptcy.

Back to this 40 year old, they cannot make ends meet and need to take control of their debt - NOW!

But why? The diagram below shows that this person’s debt outgoings are now greater than their income. If this person takes no action, then the debt levels will get to a point where the bank may foreclose the person’s bank account and take the person’s home from them.

Now, if this person decides to take option 3 above (that is, they decide to take out a secured loan), then this person no longer has a period whereby their debt outgoings are greater than their income. You can see this in the diagram below as the red line remains below the green line. What this person is doing, is to spread out their debt over such a period of time that they can afford to repay their mortgage and their secured loan. They have used this new secured loan to pay off all the other smaller personal debts (this is called debt consolidation).

But what are the drawbacks? Having to take out a secured loan will mean that you are spreading your debt over a longer period. This means you have to pay more interest over the life of the loan. But remember that credit cards, store cards and personal loans charge a high rate of interest, so paying off this personal debt over 5 years could be more than the interest charged by a secured loan over 10-15 years because of its lower rate of interest!

Most people take out a secured loan to consolidate their other debts as there are no other realistic options (apart from options 1, 2, 4 or 5 listed above which may impose serious lifestyle changes) - but these options may not be available for some people.

The ease of getting credit from banks, loan providers, mortgage providers, and credit card providers (when interest rates where low) is now putting enormous pressures on many people in the UK, and many people now have too much debt - especially shorter-term unsecured debt with high interest rates and hidden charges.

The high cost of having to re-mortgage, especially when interest rates are increasing, also increases the attractiveness of taking out a secured loan instead of a new higher mortgage amount. People also use secured loans for home improvements if they do not have too much personal debt - as they see rising house prices as an investment if houses prices continue to rise above the rate of interest that is charged on a new secured loan.

So in summary, if a secured loan is the best option for you, then please contact Indiana Loans Limited and we will arrange for a FREE , NO OBLIGATION QUOTE.

Remember!

Don’t be fooled by unrealistic loan offers made over the phone. Unscrupulous lenders often promise unrealistic rates in the hope of getting their hands on your pay slips. Once they have your documentation; loan conditions are often then revised. If this happens to you; go elsewhere.

By consolidating your existing financial commitments, you should be aware that whilst this may mean you will make short term savings, over the long term, you may end up paying more. This is because you may be extending the period of the loan. You are also transferring previously unsecured debts to a loan which is secured on your home.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP YOUR REPAYMENTS ON A MORTGAGE OR ANY DEBT SECURED ON IT.

MISSING PAYMENTS WILL HAVE SEVERE CONSEQUENCES AND MAY MAKE OBTAINING CREDIT MORE DIFFICULT IN THE FUTURE.

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