Secured Loan Advice

Secured loans involve the borrower providing the lender with some form of security, such as their property, and tend to be expensive. Find out what you need to know .

What is a secured loan?

• A secured loan is one in which the borrower has to provide the lender with some form of security, typically their property. A loan secured on a property that already has a mortgage is known as a second charge, whereas a loan against a property that is owned outright is known as a first charge. The amounts available to borrow generally range from £3,000 to £50,000, although you may be able to borrow sums up to £100,000, over a term of between three and 25 years. The lender may levy a penalty for early repayment of the loan, an important fact you need to check during the application process. In some cases, you may even be able to borrow up to 125% of your property's value, though this may be unlikely following the advent of the credit crunch.

Advantages

• It is generally easier to get a secured loan than other types of credit, mainly because your borrowing is covered by the equity in your home. Secured loans are a way of arranging high levels of borrowing that would normally be impossible via an unsecured loan and offer the option of repaying smaller amounts over longer periods. They are an expensive option but, if other avenues of credit have dried up, you need a large sum of money over a long repayment period, or you have a bad credit history, then one of these may be your best option. If you have a reasonably good credit score, there are some good secured rates still on the market.Securing these would be heavily based on an applicant's credit history.

Disadvantages

• If you have a good credit score, you would be better off choosing less risky credit from such avenues as unsecured loans, balance transfer credit cards, remortgaging or seeking a further advance on your existing mortgage, which all tend to be cheaper. For those with an adverse credit history, secured loans do provide an option. A borrower could apply for a £20,000 loan secured against a property worth £250,000 over eight years, with an adverse credit history, and still get loans from a range of providers, but at relatively high rates of interest.As of March 2009 Credit Flex offers a typical rate of 15.7%. This provider can lend up to £100,000 over 25 years. However these rates are nearing the average credit card rate, so they should only be a last port of call. Charity groups and debt specialists have long said secured loans are expensive and stretched over unnecessarily long periods. This means it takes longer for borrowers to escape their debt and they typically risk losing their home throughout this period.

How do I apply?

• The options for secured loan customers have diminished over the past year: there are now only seven major players left in the secured loans market, down from 18 companies 12 months ago. Companies have been hit by bad press – secured loans are generally seen as a risky enterprise – and falling house prices, which have made lenders more cautious about securing funds against property. You can apply for a secured loan by walking into a bank, apply over the telephone, through a written application, or via a website. Although the initial assessment of your application is speedy, you must be given a seven-day consideration period to allow you time to fully assess and understand the loan agreement. You may not always get the advertised rate on a loan as this will depend on your credit history, the amount of equity you have in your property and your ability to repay the loan.

What kind of protection do I have?

• You are covered by the Consumer Credit Act 2006, which updates the previous 1974 act which only covered consumers up to £25,000. This new protection means that secured loan customers taking out larger amounts have been covered since April 6, 2008. The Office of Fair Trading assesses all loan providers on their conduct, has the ability to fine businesses for misconduct and can champion individual consumers' cases. This is particularly of interest to those applying for loans in areas deemed to carry a 'high risk of consumer detriment', such as the home credit market, which the OFT will be focusing more on over the coming years. Borrowers should be aware that lenders also offer payment protection schemes along with loans to cover your payments in case of accident, illness, unemployment and death. Lenders' policies are rarely the best deal, may not pay out and a better protection deal could be found by shopping around.