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Secured loans are loans available to homeowners if they put their property up as security. This is why you often see the line "Your home may be at risk if you fail to keep up repayments" on advertisements or literature for secured loans – it means that your home could be repossessed if you default on the loan. For this reason you should think very carefully about borrowing money this way, and only do so if it is absolutely necessary.
However, secured loans (or "homeowner loans") are less risky for lenders, so they charge cheaper interest rates on these loans than on unsecured loans.
As well as coming with cheaper rates, secured loans allow you to borrow larger sums of money over longer periods – typically up to £100,000 on a term of up to 30 years.
These features make the loans particularly suitable for those wishing to borrow larger amounts or for debt consolidation. They have the convenience of lower monthly repayments, as the amounts borrowed are over a longer term.
As with secured loans, lenders charge interest on the amount you borrow expressed as an APR. The amount you can borrow, the term available and the APR will all depend upon the equity you have in your property and the lender's view of your ability to repay the loan. However, most secured loans are offered on variable rates, and the interest rate can change when the Bank of England base rate does, or on the lender’s whim.
If you have had credit problems in the past and so are classed as "adverse credit" or "sub-prime" by lenders, you will pay a higher APR than if you had a perfect credit history.
A common alternative to a secured loan is to remortgage your property for a higher amount than your current mortgage. You might be able to get a cheaper rate this way, but the process will probably take longer than if you applied for a secured loan and the credit check could be more stringent. With either a remortgage or secured loan you could have to pay an arrangement and/or valuation fee.
Another consideration is whether or not to take out insurance - known as payment protection insurance or PPI. This is designed to cover your loan repayments in the event of your not being able to work, through accident, sickness or unemployment. Although it is worth having in many circumstances, the sale of PPI has been the subject of much debate within the finance industry, with claims that some policies are over-priced and riddled with small print that could stand in the way of a claim.
If you are self-employed or do contract work, for example, you may find that the terms and conditions of the policy are not appropriate for your circumstances. However, if you decide you want PPI you are under no obligation to buy it from your loan provider; a cheaper policy can normally be found by shopping around or contacting a standalone provider.
Since the implementation of the Consumer Credit Act of 2006, the previous limit of £25,000 that applied to CCA-regulated loans is removed, and all loans of any size of the type regulated under the Act are covered. However, the £25,000 limit is retained for business lending, and certain high net worth individuals are able to claim exemption from regulation.
CashQuestions Guide to Unsecured Loans
CashQuestions Guide to Choosing a Loan
The Importance of Your Credit Record
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