All you need to know about secured loans
Modern consumers quickly acclimatise to new terms and jargon when shopping, such as LCD, plasma and flat screen. However, this doesn't translate to our finances with abbreviations such as APR, LTV and CPI still causing confusion.
In a country where the average household borrowing stands at £54,452 (including mortgages), an understanding of our finances is imperative, and consumers need to be aware of both the benefits and risks when taking on any financial product.
Developing an awareness of financial terms and increasing the frequency of time spent reviewing and sorting our finances will certainly help. Researching all of the options available when looking for financial products will also help us to make informed choices and get the best deals on our credit and borrowing.
To aid this, experts at Picture Financial have put together a guide to one such financial product: the secured loan. As well as highlighting who it is suitable for, it will advise on what to look out for when purchasing this product.
What is a secured loan?
Simply put, a secured loan uses the borrowers' property as security against the loan.
Credit consolidation through a secured loan is a viable route to help some people reduce their monthly repayments, offering lower interest rates over longer repayment periods.
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 and simplify their financial arrangements.
Is it for me?
A secured loan is not for everyone, and an understanding of the terms and conditions of the agreement is essential, however, there are many reasons why this can be a viable route for some. In particular, they are considered an attractive option to customers who require a higher level of borrowing than traditionally offered through an unsecured loan.
In households with multiple credit re-payments coming out on different days in the month, at varying interest rates and charges, managing money can be difficult. For people in this situation, freeing up a significant amount of money each month and getting everything in one place is a priority.
Consolidation via a secured loan is also a useful tool for those who may be unable to re-mortgage for any number of reasons. In addition, many people may have a favourable mortgage rate that they do not want to lose, they would like to repay their loan over a shorter period (compared to the typical length of a mortgage), or they simply don't have the equity.
What do I need to be aware of?
The decision to take up a secured loan or any financial product is ultimately about consumer choice: it is one option that will be suitable for some and not for others.
When making a decision about any type of financial agreement, people must consider what they want to achieve from this commitment; whether it is a priority to free up a greater amount of income every month or pay all borrowing and credit off in the shortest time possible.
This considered approach should be mirrored by the loan provider; lending to someone who may struggle to repay a loan makes no commercial sense. Any responsible lender will have a vigorous screening process in place, credit scoring all customers to ensure that they do not lend to people who cannot comfortably afford the repayments.
Financial jargon associated with secured loans
Financial jargon can be confusing, but understanding the terminology, and the meaning and implications behind them is key to ensuring you get the right financial product, suited to your own personal circumstances.
"Typical APR" (essentially what you will pay for the loan taking into account interest and other charges) can be used to compare rates for loans but you should be aware that these are just an indication of the rates offered by providers and do not take into account personal circumstances such as, credit history, employment history, etc. For example, the "Typical rate" published in adverts is the maximum rate 66 per cent of their customers get, you may get a much better rate if you have a good credit history.
Lastly, go direct to your lender to get the best rate on loans as most secured lenders will base their rate on each customer's specific circumstances. This means responsible borrowers with a good credit history won't be subsidising people whose situation is less stable. Remember, choosing a provider based on the lowest "Typical APR" rate may not provide you with the best deal possible.
What next?
Make sure that you 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 that customers fully understand the commitment they are taking on.
In addition, you should only 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 your overall financial situation to ensure that the recommended loan truly meets your needs and they are comfortable with the level of repayment each month.
A good place to look for independent financial advice is the Financial Services Authority (www.fsa.gov.uk) but you can also get help through the Citizens Advice Bureau (www.citizensadvice.org.uk) and Credit Action (www.creditaction.org.uk).
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