Borrowers in the UK have a number of choices for financing large purchases they cannot cover with cash. One of the more popular options among homeowners is to take out a secured personal loan. This type of loan is sometimes known as a second mortgage or a home equity loan.
A secured personal loan is somewhat easier to qualify for if you have a high enough net worth because the lender is not concerned with what you will be spending the money on. The property you put up as collateral, usually your home or a holiday property, offers the protection the lender needs regardless of your plans for the money. However, failure to make good on a secured personal loan can lead to unanticipated trouble.
The Benefits of a Secured Loan
The benefits of a secured loan rest largely in the idea of equity. As you pay off your mortgage, you build up equity in the sense that your property is worth more on the market then you owe the bank. The difference between those two numbers gives you some bargaining strength when you are looking for a loan. How so? Because a lender would be able to recover more than you owe should you default on your loan while the real estate market remains strong.
For borrowers this means the opportunity to put the equity in their homes to good use. Essentially that equity does not do much good until the homeowner is ready to sell the house. However, if that sale is still 10 or 20 years away, the equity can be used to the homeowner’s advantage in the interim.
Some things people commonly use secured loans for include:
- Debt Consolidation - The idea of a secured personal loan for debt consolidation has really taken off in the UK. More and more homeowners are recognizing the value in getting a low interest personal loan to pay off high interest debt from credit cards and other sources. This is one area where putting your equity to use is really advantageous.
- Home Improvements - Another good use for a secured personal loan is to make improvements that will drive the value of your home up. You might consider converting your loft into living space, adding or expanding a conservatory, or remodelling the kitchen and bathroom. The value such improvements add to your house may very well offset the cost of your secured loan when it comes time to sell.
- University Tuition - Although just about every university student in the UK is entitled to some sort of financial assistance, some families may earn too much to qualify for enough student loan money to make it work. Getting a secured personal loan is one way to help cover the costs of sending a child to University.
- Elective Medical Care - Ever since medical tourism took off a few years ago, there are a number of travellers every year who elect to have certain medical procedures done abroad. However, to finance both the procedure and the holiday surrounding it, some turn to secured loans. It is not a bad way to do things if you can afford to repay the loan promptly.
Keep in mind that while most secured personal loans use a home as collateral that does not necessarily have to be the case. It is possible to use other forms of collateral as long as there is a reasonable expectation that the seizure and sale of the collateral will allow the lender to recoup their losses.
Also keep in mind that the law prevents you from borrowing any more than £25,000 using an unsecured loan. Secured loans are designed for people who need to borrow large amounts of money and have the collateral to back up. Secured personal loans can be as high as £100,000.
Idiosyncrasies of Secured Loans
Every type of loan has its own idiosyncrasies, secured personal loans included. These idiosyncrasies have more to do with how a loan is structured than anything else. In terms of the secured personal loan, that structure would include things like interest calculations, lien holders, and so on.
Beginning with interest calculation, understand that secured personal loans are usually based on a variable rate. That means the interest rate will fluctuate according to market conditions. The most important thing to know in this area is how often the rate can go up or down. Is your lender planning to allow the rate to be adjusted on a monthly or annual basis?
Next question is one of lien holders. Assuming you are using your home as collateral for the secured loan, you are adding a second creditor with a lien against your property. That lien states that the lender has a financial interest in your home, an interest that can be settled by seizing and selling a home if necessary.
Here's what you need to know about lien holders: the holder of the second mortgage does not need permission from the holder of the first mortgage to seize and sell a home. If the homeowner fails to make good on the secured loan then the lender can take the house. Any monies realized from the sale of the house must go to satisfy the primary mortgage provider first; what's left can go to the holder of the second mortgage.
One last idiosyncrasy comes by way of using a secured home loan to consolidate debts. As explained by MoneyFacts, although it's sometimes better in the short term to consolidate debts with a secured loan, you may actually end up paying more in the long run if the repayment term is stretched out to 20 or 30 years.
Falling behind on Repayment
Consumers who fall behind on the repayment of the secured loan tend to find themselves in a position of regretting having taken out the loan to begin with. However, regret does not help. If a way is not found to satisfy the loan, in due course the consumer could very well lose their house or whatever property they put up as collateral.
If you find yourself in this position, remember these key points:
- Lenders are Flexible - Despite what you may have seen in the news, most lenders are a lot more flexible than they are given credit for. In fact, it usually costs them more to pursue legal action then to renegotiate loan terms. Therefore, as soon as you realise you are having trouble, contact your lender and see if you can work out a more amenable payment plan. If you don't wait, you stand a good chance of being successful.
- Rights of the Lender - According to Shelter, the company that loaned you the money does have the legal right to protect its investment. That also means they have the right to seize and sell your property in the event of a default. Do not make the mistake of thinking that as long as you are faithful to your first mortgage, the company that holds second mortgage is powerless. It is simply not true.
- Responsibilities of Lender - In order to protect consumers from overly aggressive collections there have been certain regulations put in place lenders must follow. For example, before instigating litigation for default the lender must first provide the customer with a notice of a sum in arrears. If that notice goes unheeded, the company then must send a notice of default. Only when both have been sent and not acted upon can the lender begin legal action.
- Remaining Balances - If collateral is seized and sold yet enough money is not realised to satisfy the outstanding loan, the consumer is still responsible for paying the remaining balance. How that happens will be determined by a court. Nevertheless, understand that wages can be garnished and other personal property can be seized if a court deems it necessary.
Shopping for a Secured Loan
The hardest thing about shopping for a secured loan is trying to work the monthly payment into your budget. What makes it so difficult is the variable interest rate attached to most of these loans. However, you can use numbers from the previous 12 months as a means of forecasting what is likely to happen with your interest rate. Doing so makes it possible to come up with a pretty good estimate of your monthly payments.
That said, when you shop for a personal loan look for one with the lowest current rate. Keep in mind that variable interest rates are almost always tied directly to the LIBOR rate, published daily by the British Bankers Association. Depending on the structure of a given secured loan, a variable rate could move up or down every month.
In addition to the variable interest rate, pay special attention to the terms of the secured loan you are thinking of. The terms cover everything from repayment schedule to the assessment of fees to default procedures. These terms and conditions could mean the difference between a loan you can afford and one you cannot.
By law, your lender is required to offer you full disclosure before you sign any loan paperwork. Nevertheless, it is still your responsibility to make sure you read and understand the loan offer and all its details. Lack of understanding probably will not help you in a court of law unless it can be proved that the lender purposely deceived you.
If you have certain financial needs that would benefit from taking out a secured personal loan, doing so is certainly an option. Millions of UK residents have availed themselves of these loans since they were first introduced some years ago. They can be helpful to you if you make the point of borrowing and repaying responsibly.
Finding the right secured loan can be a challenge if you are not sure what's out there. We have compiled some links here to give you a good representation of what you will find. If you like the offers from any of these companies, feel free to apply.
MKL Finance - A financial broker offering loans arranged through a partnership with their own in-house lender. You can complete their no obligation online quote form in under 5 minutes or take the time to browse through all of their pertinent information first.
Barclays - Barclays does not make secured loans themselves, but they do offer customers the loans through their partner, Freedom Finance. When you apply for a secured loan here, Freedom Finance will look for the best loan appropriate to your circumstances.
Shawbrook Bank - This company claims to have been one of the first to offer secured home loans in the UK. You can borrow up to £200,000 based on the equity in your home. All loans go through one of the bank's many brokers located throughout the UK.
If you are looking for the fastest and easiest way to compare secured home loans, you might try a comparison website. These sites keep track of the market across the UK in order to bring you the best deals possible. Follow these links to great comparison sites where you can shop for secured loans:
Go Compare - All it takes to compare secured loans here is the completion of a short, online form. You can compare here without having an impact on your credit rating.
Money Supermarket - This site lets you compare secured loans according to the strength of your credit profile. From good to poor credit, they have a number of secured loan products from which to choose.
Confused.com - Here you will find side-by-side loan offers from multiple providers. To see different offers just change the scope of your search via the amount you want to borrow or how much time you will need to pay it back.
uSwitch.com - This site shows you side-by-side comparisons based on the information you input. You'll be able to see APR, total repayment amount, length of term, and a representative example.
Money.co.uk - The grid format used by this site makes it easy to compare unsecured loans. They show you LTV amounts, representative APRs, minimum and maximum amounts, and length of term.
Totally Money - A site comparing secured loans from reputable UK lenders. Enter your information here, then sit back, and wait for an FSA regulated broker to call you with loan details.
Money Saving Expert - The guide found here explains secured loans as well as their advantages and disadvantages compared to other types of borrowing. This is good information if you are not familiar with normal loan procedures.