A secured loan is any loan that requires the borrower to provide the lender with some form of additional security. This is generally, (but not exclusively) in the form of secured homeowner loans, where the security will be the borrower’s property, regardless of whether it has a current mortgage or is owned outright. If the property is already mortgaged any further secured loans are known as second charges, whereas loans secured against a property owned outright with no current mortgage are known as first charges.
This type of loan is usually available in amounts varying from $3,000 to $75,000 and may generally be used for any legitimate purpose, including consolidation of existing debts. The amount borrowed will be repaid monthly over a term agreed between yourself and the lender, usually between three years and twenty-five years. The term will be determined by factors including the level of repayments that you feel comfortable committing to.
There may be a penalty if you repay your secured loan earlier than agreed, and you should carefully check each lender’s conditions and be sure that they meet your needs. Lenders charge you interest on the amount borrowed, this is expressed in terms of the Annual Percentage Rate (APR). APRs were introduced to help borrowers compare the true cost of a given loan over the life of the secured loan and to avoid possible confusion caused for example by introductory discounted rates.
As a rule it is advisable to compare the quoted APRs when deciding the competitiveness of different loans. The amount you can borrow, the term and the APR will depend on several things. These include the amount of equity remaining in your property (the value of your property less all existing loans secured against it), the lender’s view of your ability to repay the loan and your personal circumstances, for example, your age or any adverse credit.
Subject to your circumstances, you may be able to borrow up to 125% of the property value. The APR quoted by the lender will usually be typical rates, and these act as a guide only as the exact rate offered may be determined on an individual basis. Secured loans are generally much easier to arrange 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 those who are self-employed, have recently changed jobs, or have for any reason obtained an adverse credit rating can take out a loan. Secured loans are generally preferable for larger amounts or where a longer repayment term is desired to reduce monthly payments.
How safe are Secured Loans?
The Consumer Credit Act 1974 regulates secured loans up to a value of $25,000 and for these, a considerable period of 7 days (the cooling-off period) must be provided by the lender prior to the loan funds being made available. Regulations under the Act cover how money is lent. Loans above $25,000 are unregulated. When taking out a secured loan you will be asked to sign a credit agreement, which should be read carefully as the terms are binding.
Most lenders offer insurance policies and payment protection schemes to cover your monthly repayments on secured loans in the event of accident, sickness, unemployment and death (conditions apply). The cover does vary between lenders, as does the cost, therefore you should check individual policies for what is included, and just as importantly, what is excluded.
Please remember that the lender’s security on your property means that in the event of non-payment of a secured loan the lender has the right to ask the courts to enforce the sale of your property to recoup the total remaining debt. If you have problems making repayments on time, you should inform your lender as soon as possible and seek their advice and guidance. The earlier you seek their help, the more sympathetic your lender can be. Independent advice should also be sought, one such free, voluntary agency is the Citizens Advice Bureau.