Essential Facts About Secured Loans
Secured loans, also frequently referred to as second mortgages or second charge loans, are essentially a second mortgage that is listed right below the first, and the property is the security for the second mortgage. A secured loan is a great tool when a person must provide a source for debt consolidation, complete home improvements, or even take a holiday. In simple terms, it means having two separate loans for which the property is the security; however, the first loan is not affected by the second.
Reasons for Seeking a Second Loan
Considering secured loans as an alternative for your clients will soon be a regulatory requirement due to upcoming changes. Whether the loan is desired for the purpose of consolidating debt, to make home improvements or for other reasons, property owners are finding secured loans an increasingly popular and viable option.
Secured Loan Benefits
- Easy Qualifications
Unsecured loans are typically cheaper for individuals with fair to excellent credit scores; however, as the name implies, secured loans offer lenders collateral, and therefore most loan companies are willing to offer such loans to consumers even if their credit is poor.
- Large Borrowing Possible
£35,000 is the maximum unsecured loan, but secured loans can be acquired in amounts up to £75,000.
- Longer Terms
Secured lenders prefer lengthy loan terms, as arrangements of this type offset the initial setup cost of the loan, which can be quite expensive. Therefore, the duration of such loans is usually anywhere between five and 20 years. Unsecured lending, on the other hand, is generally one to seven years, and although longer loans are possible in order to lower the monthly repayments, they also significantly increase the total interest repaid, as outlined below:
Applying for a Secured Loan
A consumer with a current home mortgage can apply for a secured loan provided the person has enough equity in his or her property to cover the borrowed amount.
If the client co-owns his or her property with another person, or if the client has a spouse or is in a civil partnership, a joint application is required.
Advantages and Disadvantages
Secured loans for homeowner loans can be acquired in any amount between £5,000 and £125,000, making them a good choice for those who desire a substantial loan.
Even though total borrowing costs frequently work out higher than just the borrowed amount and the interest, the headline interest rate on the majority of secured loans will fall somewhere between five and six percent.
An additional benefit is that it is easier for your client to repay the loan, as the monthly payments are fixed.
The amount a client personally borrows through a homeowner loan depends on the person’s income, existing credit commitments, overall credit score, and the amount of the property’s equity.
Therefore, although lenders may offer loans of up to £100,000, only a fraction of that may be available to consumers who have low credit scores, too many loans already, or not enough equity in their property.
Similar to personal loans, the interest rate provided by the lender varies from one borrower to the next, based on credit. Additional disadvantages include repossession of property if the borrower defaults on the repayments. For this reason, most consumers are motivated to pay in a timely manner.
Secured Loan Alternatives
A popular example of an alternative to a homeowner loan is an unsecured personal loan of up to £15,000, running for a length of five years. With this option, the consumer can avoid placing his or her dwelling in jeopardy, and the loan may also feature a lower interest rate.
Borrowing more than £15,000 may present difficulties, however, if the loan is not secured. Therefore, the best option for those looking to borrow a large amount of money is re-mortgaging to free up some cash. Mortgage rates for consumers with lots of equity can be as low as two percent.
Nevertheless, the downside includes the possibility of high initial fees and paying interest on the entire amount owed for a longer length of time.
- Can a client who does not live on the property apply for a secured loan?
Yes, provided the person can prove the existence of a formal tenancy agreement.
- How do secured loans work?
In simple terms, the borrower has a loan that is secured against his or her property’s equity. He or she is required to make regular repayments until the initial amount borrowed, as well as the accrued interest, is paid off.
- For Whom is a Secured Loan the Best Option?
Secured loans are not associated with upfront fees, and are usually more flexible for those on benefits only or pension incomes, or who reside in ex-council houses.
- Self-employed clients without accounts
Affordability checks have become tougher than ever before, and many banks now require as many as three years of accounts for income proof. However, certain secured lenders on the Clever Lending panel accept an accountant’s reference, tax return or bank statement as proof of income.
- The client has a complicated credit profile
Secured loans are quite flexible with regard to eligibility, and therefore they are a good alternative for clients who have had problems in the past acquiring credit. Even those with missed payments or defaults on their credit history may find the solution is a secured loan from Clever Lending.
- The client wants to retain his or her current mortgage arrangement
The client may prefer to retain a current low or fixed mortgage that was previously acquired. Opting for a secured loan is one avenue through which to keep the current rate stable, whilst simultaneously raising capital.
- The client does not have enough equity for a re-mortgage
The client may discover there are limited LTV lending alternatives available. Therefore, if he or she has little or no equity, the preferred choice may be a secured loan. Clever Lending can assist individuals to identify possible alternatives if this is the case.