Secured loans - when do they make sense and what for?

	Typical APR	Per Mth
	7.6%	£229.59
	7.7%	£230.91
	7.9%	£233.57
	8.9%	£247.01
* Based on £25000 over 15 years secured and is not a full search of the whole market

Secured loans can make financial sense in certain circumstances but as borrower you should carefully assess the terms and conditions attached to the loan and be 100% sure of your ability to repay. The lender enjoys the 'security' aspect of the loan, not the borrower; if you default on repayment the lender can forcibly sell your house to recover the loan.

Your house is the security. Although it is theoretically possible to secure a loan against something other than property (a Leonardo original, say) for most people their house is their most valuable capital asset, whether mortgaged or owned outright. This is why many argue that secured loans are loans of the last resort; and that the only justifiable reason for such a borrowing route is a need to reduce or consolidate existing debt costs.

Research bears this out; the two leading reasons for taking out a secured loan are unsecured debt consolidation and the financing of home improvements (perhaps, if repossession is already risked through non-payment of the mortgage, the second charge of a secured loan on the property is unlikely to increase the number of sleepless nights).

Other popular reasons for secured borrowing are, apparently, new car purchase, the funding of weddings and buying property abroad. Given the UK public's current appetite for borrowing, the secured loans industry is unlikely to go into recession. Datamonitor research expects such loan advances to reach £51 billion by 2008; this compared to the £28 billion racked up in 2003.

But there now appear to be a real risk of financial over-extending. It was reported in August (Combined Insurance research) that unemployment would result in some 60% of borrowers defaulting on personal loans and credit card balances within 3 months of losing their income. More than 40% would default on mortgages within the same time frame.

Citizens Advice reports that debt levels (excluding mortgages) over £100,000 are not uncommon anymore and its advisers are increasingly recommending clients to declare bankruptcy. The end-June quarter of this year generated 15,000 recorded bankruptcies, the highest quarterly number since official figures were first compiled 40 years ago and an almost 40% increase on the same period last year. Eighty per cent of them were not business but personal bankruptcies.

Against such a backdrop of possible financial terror, can you justify a secured loan? Is it the best course of action and have you fully explored the alternatives to raising money or reducing debt? It might be better to remortgage (but be aware of arrangement and exit fees), arrange a personal, unsecured loan, or do some nifty juggling with credit cards and balances.

How your secured loan works

However, secured loans do have their plus points. They are granted quickly and are easier to obtain, especially by those with poor or blemished credit ratings, because the lender has security in the form of property. Bigger borrowing is possible than with personal unsecured loans; the amounts available ranges from £3,000 up to £50,000, although some lenders will consider sums as high as £100,000.

Repayment is on a monthly basis over a term agreed at the outset, varying from 3 to 25 years (unsecured lending is usually over a period of 1 to 7 years). Sometimes it makes sense to borrow at a higher rate of interest for a shorter period; a 10% loan rate over 5 years is less expensive than remortgaging at 5% over 20 years.

The amount borrowed, the term available and the APR decided upon (from around 7% upwards) will all depend on the level of equity you hold in your property, the lender's view of your ability to repay and the presence of any adverse credit circumstances, e.g. existing debt arrears or County Court judgements.

Secured loan rates are usually variable and follow UK base rate moves as well as sometimes changing for the lender's own reasons. So, before taking out a loan, always assess your ability to repay should the rate go up, particularly if you are converting from a fixed rate debt situation.

Never borrow more than you need. Read the terms of the agreement carefully (they are binding) before signing up. Note that secured loans up to £25,000 are subject to the Consumer Credit Act 1974; the lender must provide a consideration period of 7 days.

You will also need to take out loan payment protection insurance (often part of the loan deal anyway); be sure to get a competitive rate, as such PPI policies are viewed as 'easy money' by some insurers and lending institutions.

15 July 2008 © Moneyextra.com

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