Secured Loans Primer

Secured Loans Primer
What is​ a​ Secured Loan?
A secured loan is​ essentially a​ loan that is​ taken out against your home or​ other collateral .​
In the​ context of​ this guide,​ when talking 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​ purchase a​ property outright so most of​ us will therefore need to​ secure a​ mortgage.
Again,​ in​ the​ context of​ this guide,​ when talking about secured loans and secured lending,​ reference is​ being made to​ secondary secured loans,​ or​ ‘second charges’ as​ they are commonly 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​ very appealing prospect .​
They are able to​ lend out large sums of​ money with the​ additional security of​ a​ property - They will subsequently have open to​ them a​ number of​ legal remedies in​ the​ event of​ the​ borrower defaulting there obligations and payments – This will of​ course 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 at​ the​ same time 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 many 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 so long as​ you​ meet the​ repayments on​ your first mortgage .​
This is​ not true .​
If you​ fail to​ meet the​ repayments on​ your secured loan,​ even if​ 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​ £100,​000,​ depending on​ the​ lender .​
Flexible terms are also available on​ secured lending,​ ranging from 5 up to​ 30 years .​
Some lenders will have schemes available allowing you​ to​ borrow more than the​ value of​ your property (combined with that of​ your first mortgage) of​ up to​ 125% .​
These schemes are not too common and it​ is​ believed that this is​ more of​ a​ marketing ploy rather than a​ viable or​ an​ advisable option to​ many borrowers.
How Does a​ Debt Consolidation Secured Loan Work?
A debt consolidation secured loan enables borrowers with significant levels of​ debt to​ consolidate some or​ all of​ these outstanding commitments into one loan amount and subsequently,​ one monthly payment .​
Debt consolidation is​ seen by many as​ an​ extremely 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 is​ able to​ achieve a​ lower rate of​ interest than that applied to​ their unsecured commitments.
Not only will this take the​ effect of​ reducing the​ monthly payments but also secured loans can be arranged over a​ longer term than that of​ their unsecured counterparts .​
By extending the​ term of​ the​ loan will also mean that lower monthly 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​ end up paying more interest .​
The other potential disadvantage of​ these types of​ loans is​ that consolidated debts that were once unsecured would then transform to​ being secured on​ the​ property.
What Are the​ Benefits Of a​ Secured Loan?
There are many benefits to​ be realised in​ taking out a​ secured loan .​
Many lenders and brokers alike will not 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​ very 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 considering a​ remortgage.
Perhaps the​ biggest appeal to​ most homeowners who are seeking finance is​ the​ speed at​ which a​ secured loan application can complete .​
At the​ top end of​ the​ scale,​ an​ application can take just a​ matter of​ days to​ complete .​
However for the​ majority,​ two to​ three 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 obtain 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 many lenders .​
If it​ is​ the​ intention of​ the​ borrower to​ obtain the​ very lowest monthly payment then this could be large benefit to​ them.
How Do I​ Know Whether I​ Should Take Out a​ Remortgage Or Secured Loan?
Each case must be assessed on​ its own merits .​
It is​ impossible to​ answer this question without careful consideration and assessment of​ the​ borrowers circumstances,​ needs and objectives.
The obvious example would be where a​ borrower seeking finance has a​ large 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​ course result in​ 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 started to​ miss payments or​ run up another form 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​ entire 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.
Can I​ Apply For a​ Secured Loan With a​ Bad Credit History?
There are many schemes available today to​ cater for nearly every type of​ borrower – regardless of​ credit history .​
If there is​ available 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 severe your credit history then the​ higher the​ interest rate that you​ will be charged .​
This again is​ a​ reflection of​ the​ higher level of​ risk perceived by the​ lender.

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