Julia Dallimore of secured loan provider Picture Financial, writing for MyFinances, explains the ins and outs of secured loans - their risks, benefits, and suitability.
Demystifying Secured Loans
Thursday, 12 Oct 2006 11:03
Julia Dallimore of secured loan provider Picture Financial, writing for MyFinances, explains the ins and outs of secured loans - their risks, benefits, and suitability.
Our appetite for borrowing is continuing to rise with recent figures revealing that we have over £190 billion of consumer credit in the UK and around £999 billion borrowed in mortgage arrangements. As a nation we continue to use credit to help manage our standard of living and as a result, unsecured consumer credit has grown at an average of 8.6 per cent every year since 2000. These levels of consumer credit have equally seen the demand for consolidation grow as well.
Consolidating credit essentially means putting all of an individual’s existing credit and borrowing - such as credit cards and personal loans - into one place. It is mainly used by people to get a clearer track on their monthly outgoings often reducing how much they have to pay back each month. There are different methods that help people restructure their borrowing and it is important that every individual considers the options available to them to ensure they get the best deal possible.
Credit consolidation through a secured loan is a viable route to help some people reduce their monthly payments. Outstanding credit, which can be built up through a mixture of unsecured loans, credit cards and other types of borrowing, can be wrapped up in one loan, enabling borrowers to considerably cut their monthly outgoings. This type of loan can reduce monthly repayments as they offer lower interest rates over longer repayment periods.
Secured loans are an attractive alternative to customers who are unable to re-mortgage or who don’t want to remortgage due to a good fixed-interest rate or who want to borrow over a shorter period or those who require a higher level of borrowing that that available through an unsecured loan (maximum £25,000).
Simply put, a secured loan uses the borrowers’ property as security against the loan. This is a significant financial commitment so consumers should be totally aware of the agreement they are making and entirely sure they are able to maintain the repayments.
Borrowers are also advised to use a responsible lender. The company should carry-out rigorous checks to ascertain what level of borrowing will be suitable for the individual and ensure customers fully understand the commitment they are taking on. In addition, it is recommended to use a loan provider that is a member of the Finance & Leasing Association (FLA) and complies with the FLA Code of Practice. A reputable secured loan provider will take the time to get a comprehensive picture of an individuals’ overall financial situation to ensure the recommended loan truly meets their needs and they are comfortable with the level of repayment each month.
As discussed, secured loans can offer lower interest rates and more flexible repayment terms, than existing credit, but they might not be the most suitable product for everyone. An unsecured or personal loan is probably a good route for people who are looking to consolidate smaller amounts of credit (up to £25,000k) or cover certain items such as, a car or a holiday. These types of loans are generally over shorter periods and dependent on the amount borrowed, may provide lower rates of interest.
However, before entering into any type of agreement consumers must have fully weighed up the commitment they are taking on. It is important for people to consider what they want to achieve from consolidating their credit; whether it be freeing up a greater amount of income every month or wanting to pay everything off as soon as possible. Once people are clear on their overall goals for their money management they can be better informed about the options in front of them.
Example of the savings through a secured loan:
An example of the different rates of borrowing: The table below outlines the repayment required for a credit card with a balance of £30,000 with a typical interest rate of 17.9 per cent (if paying the monthly minimum payment):
| Repayment length | Current monthly repayment | Total repayment |
| 26 years, 1 month | £900 | £54,063.24 |
With a secured loan of the same value with a typical interest rate of 7.9 per cent from Picture, the repayments would be:
| Repayment length | Current monthly repayment | Total repayment |
| 10 years | £358.74 | £43,048.80 |
| 15 years | £280.98 | £50,576.40 |
| 25 years | £224.99 | £67,497 |
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