When you're looking for a loan, one of the first issues you'll need to decide is whether it should be secured or unsecured. The decision is seldom straightforward so here are a few pointers.
Before we start, it's important for you to understand the difference between the two sorts of loan.
With secured loans, you agree to allow the lender to register a legal charge on your property at the Land Registry. As most homeowners already have a mortgage that's secured by a first charge on your home, the loan company has to agree to take a charge that ranks behind the first charge. Then, if you sold your house, your solicitor would firstly repay your outstanding mortgage and then the remainder is used to repay the second charge (and any other registered charges). Only when the solicitor has repaid all the registered charges, do you receive the rest of the sale proceeds.
The most important point you have to understand about any secured borrowing, is that if you default on the repayments, then the lender will automatically have the right to apply to the Courts to repossess your home and sell it to recover the money they are owed. Therefore, you need to carefully consider the matter before you agree to such a charge. If you are in any doubt, consult your solicitor or financial adviser.
Unsecured loans are different. You don't provide any security to the lender. As such, the lender views the loan as a more risky venture as the lender has no automatic route to get back what it is owed.
Therefore you'll appreciate, that if you're not a homeowner you don't have to decide between a secured or unsecured loan. As you have no property to secure the loan, you can only apply for an unsecured loan.
Unsecured loans are normally available from £500 up to £15,000 (sometimes £25,000), and the repayment period can stretch from 3 to 12 years. As these loans are more risky for the loan company, then on a like for like basis, they charge a higher rate of interest for an unsecured loan compared to a secured loan. Interest rate premiums of between 1% and 3% quite common and if you have a badly impaired credit record, your application may well be declined.
As you would expect, lenders are far more relaxed if you agree to provide security. Typically the amounts you can borrow range from £5,000 to £75,000, and sometimes even more. And they'll allow you to spread your repayments over a longer period – 12, 15, 20 and 25 years are common. The choice is yours although to minimise your monthly repayment, you'll need to choose the longest repayment period you can. The interest rate you're charged will then depend on your credit rating.
In today's market if you have a good credit record, the best Internet loan rate you'll find will be around 5.8% - but it can be as high as 17% to 20% if you have very severe credit problems. These days around half of all homeowners have some form of impairment on their credit record. This means that even if they wanted an unsecured loan they may well be declined. In these circumstances, a secured loan will be the only option available and even then, they won't qualify for the lowest interest rates.
Now your instinct will tell you to shop around for the cheapest deal – but that's not a good idea! The problem is that if make a number of applications, you'll actually end up damaging your credit rating. That's because each of your applications is recorded by the big credit agencies such as Experian and the more applications they record, the lower your credit rating becomes. As a result each successive quotation will tend to become poorer and poorer and in the end all you'll get is outright refusals. Not only that, but your damaged credit score could remain with you for several years making your financial life more difficult.
So what's the solution? Generally, your best bet is to use a specialist loan broker. They know all the lending institutions and after chatting with you on the phone they'll know which lender is most likely to accept your application and offer you the best possible interest rate. Thereby, you avoid making multiple loan applications, preserve you credit record and should be assured a good deal.
And where can you find these specialised loan brokers? Online of course! Simply enter “secured loan” in your favourite search engine and you'll find lots to choose from.
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