The Ultimate Guide to Secured Loans

Major expenses pop up now and again in life, and you may want to extend your house, pay off expensive unsecured debt, or have an expensive wedding to pay for. These sort of sudden expenses require bundles of money that most people do have tucked away in the bank. Yet people still manage to deal with these expenses every single day. How is this possible? It is sometimes possible using something known as a secured loan.

Basic Information

What is a secured loan?

A secured loan is a special type of borrowing wherein an individual places his or her property as security for the loan. The property essentially then becomes the collateral. If the borrower fails to meet the repayments requirements, the lender can then seize and sell the home to recoup money owed. Because this type of loan offers collateral, it’s much easier to obtain, sometimes regardless of the homeowner’s income level, job status or credit history. The lender gets the added security of knowing that he or she can repossess the property in case the borrower ever defaults.

Is this type of loan known by any other names?

Secured loans are also known as a (second charge loan) or second mortgage. The second alias came about because this type of loan is very much like a second mortgage. However, it holds no actual financial ties to the original mortgage, meaning that the secured loan will likely not share the same interest rate, let alone the same terms. This also means that the homeowner must pay off the loan as he or she is paying off the original mortgage. So this is sometimes referred to as a second mortgage of sorts, although it’s not actually a mortgage.

Why is a secured loan better than a personal loan?

A secured loan is better for homeowners who want to borrow larger quantities of money. It is also better for people who need a longer payback period (up to 25 years). Furthermore, lenders who offer secured loans are much more flexible lending to self-employed workers, as well as those with a low income or poor credit score. The last benefit is they usually come with lower rates than unsecured loans.

What are the downsides to pursuing a homeowner loan?

Because this type of loan relies on using property as collateral, it places the individual’s home at great risk if the borrower defaults on the loan for any reason, as the lender can take possession in default. Also, the interest rates for this type of loan tend to be variable. This means that they just base on market conditions. This in turn makes it very difficult to set up a long-term budget plan.

Almost any purpose

This kind of loan can be used for a few purposes.

  • to consolidate debts.
  • home improvements.
  • pay for a wedding.
  • pay for education
  • to make an expensive purchase.
  • buy a sports car
  • dream holiday
  • buy or invest in a business.
  • pay off bills or mortgage arrears

How much can I borrow?

Homeowners can typically borrow anywhere between £5,000 and £500,000 on homes that have up to 85% loan to value. However, the specific amount will depend on various factors including the person’s credit rating, as well as the particular lender chosen. It is wise for potential borrower to consult with a broker like apple loans to establish the best deal. This will give you a chance to compare different figures and offers.

Is a broker required to pursue a secured homeowner loan?

Unfortunately, main stream secured loan lenders prefer not to deal directly with the public. This means that homeowners almost always must secure the services of a loan broker like appleloans.co.uk. The broker handles all the paperwork, the legal aspects, and the whole application from start to completion. Most good brokers will personally oversee any negotiations and exceptions that may need to be made via the main lenders. For this service, the broker charges a fee usually a percentage of the loan. However, the fee isn’t due until the loan is paid out in full.

Eligibility Requirements

Who is eligible?

Applying for this sort of loan requires that the applicant not only own a home, but that he or she also has an outstanding mortgage on the home. Furthermore, the individual’s home equity (which is the value of the home minus the outstanding mortgage) must meet or exceed the value of the loan. So if someone wants to borrow ₤50,000, the equity must be available.

Note also that if the homeowner owns the property with someone else (say a spouse), then both persons must jointly pursue the loan. Additionally, a loan cannot be sought if the homeowner shares ownership with an organization such as a housing association.

Are there any age restrictions?

The borrower must be at least 18 years of age to apply for a secured homeowner loan.

Can someone with no mortgage still apply?

A second charge loan sits behind your main mortgage. This means that someone who already paid off his or her mortgage in full is not eligible for this type of loan. It seems counter-intuitive, but it relates back to the highly complex rules of finance, where a secured loan can only be a second charge option.

Can someone who is self-employed apply?

A self-employed homeowner can apply so long as he or she has been performing self-employed work for at least 1 year, some lenders require more than this. You may also be asked to provide SA302 (paper tax calculation form) and several months’ worth of bank statements to prove you can repay your loan.

Can someone who works part-time apply?

Both part-time and low-income workers are eligible for a secured loan, but they face tough scrutiny. It helps if the individual receives some sort of government benefit. It also helps if the homeowner has a very low LTV rate.

Can someone with poor credit apply?

Homeowners with poor credit can still apply, but they will face greater scrutiny and usually must own more than 40% of their home already. They naturally pose a much greater risk to the lender. The only time those with poor to really poor credit scores get approved for a loan is when they have exceptionally low LTV rates.

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 Can someone who doesn’t live on the property apply?

A homeowner can apply for a secured loan even if he or she doesn’t live on the property. If the applicant is renting the property to a tenant, he or she will need to supply the formal tenancy contract to the lender as proof. Furthermore, homeowners who rent their homes must carry an LTV lower than 70%.

Are there any viable alternatives for ineligible homeowners?

Applicants who are ineligible for this type of loan may be able to obtain an unsecured loan from a bank. They may also be able to get some sort of loan through a credit card agency. However, they will not be able to obtain usually more than £12,000.

Application Process

How does a homeowner apply for a secured homeowner loan?

Many lenders refrain from accepting direct applications for a secured loan. They prefer that the homeowner go through a certified broker. The use of a broker is similar to the use of a lawyer. A broker already knows and understands the whole process, so it saves the lender an enormous amount of time.

Must the homeowner pay an application fee?

The applicant usually does not have to pay an application fee. However, there will be a final arrangement fee. This fee includes the original loan, any accrued interest and all associated fees. Note that this fee is not charged until later down the road. This means that it’s wisest to pay off the loan as quickly as possible, as the fees will keep accruing.

Does the loan application affect my credit record?

The answer to this question depends entirely on the broker chosen by the homeowner. Some brokers initially run a soft credit report to establish credit history. If they approve the result and approve the loan, they then run a full credit history check which is then recorded on your file. Keep in mind that not all brokers follow these same guidelines. Also keep in mind that obtaining the loan would actually look good on the homeowner’s credit report if the repayments are made each month.

What information does the homeowner need to provide to complete the application?

The borrower must sign and return the formal loan agreement. You may also first have to prove your identity and income as well, and provide mortgage information. Again, the requirements differ by broker. It is best to prepare as much information beforehand as possible. The broker will know exactly what’s needed to complete this application process.

Will the lender contact the homeowner’s employer?

The lender will never contact the an employer without permission. Usually the lender will ask permission to obtain a reference from your employer. Those with low credit scores or part-time employment may also be cross referenced so that there is minimal risk.

What is the application process?

The first part of the application process involves simply proving that everything on your application form is true.

  • You will need to prove your income with bank statements, pay slips or employer’s reference. The lender needs proof that you are capable of keeping up with payments. They may also want to know your past employment history.
  • You must prove your identity with a driver’s license, and passport, plus utility bills. Due to the abundance of identity scams these days, lenders take extra precaution in ensuring that they’re dealing with the correct person.
  • Your mortgage statement and balance is required to ultimately confirm the total loan to value. As mentioned earlier, only someone with an outstanding mortgage balance on his or her home can apply for a secured loan. The balance could be just £100, but cannot be £0.

The broker will compare this data against the Electoral Roll, as well as credit reports from all the major agencies. The goal is to determine whether you have any missed payments, county court judgments or defaults on record. If any such judgments are found, they will inevitably be scored negatively for the applicant.

If all goes well, the broker will then approve the loan. Whether or not this will occur depends on a few of previously mentioned eligibility factors.

How long does it take for the loan payment to be made?

A secured loan can take anywhere from 2 to 6 weeks to be paid out. Usually this is dependant on time taken giving information and signing documents. Responding to all requests for information and quickly signing agreements will help speed the process up. However, it is very rare but some loans have been paid in 15 days. This is because there is a consideration period you must have by law.

Why is this waiting period so long?

This waiting period is specifically known as the ‘consideration period.’ It is the lenders hope that the homeowner will think long and hard about the decision to secure a loan on their property. The goal is to ensure that the homeowner is indeed serious about borrowing such a large sum of money. Such a loan comes with many responsibilities, and lenders want these responsibilities to sink in before accepting the money.

Repayment Process

How is repayment made?

If successful, you will be required to make monthly repayments. The size of the required payment will depend on numerous factors, including interest rate, the loan amount, and the terms associated. Payment is usually taken by direct debit.

When do the repayments start?

The first date of repayment is ultimately up to the borrower. However, most lenders require that the first payment is made within the 1st month of the loan agreement term. This means there is no so-called “grace period” involved. In fact, “grace periods” are only offered for a select few types of loans, such as student loans.

What happens if I cannot afford the repayments?

If you end up in the unfortunate situation where you cant afford the repayments, you should immediately speak with your lender who may be able to work out a an alterative payments plan, however late fees will still be charged. Furthermore, its exceptionally important you do everything to catch up with the arrears, or you risk a default being registered on your credit file.

What happens if the repayments are not made for some months?

If your monthly repayments fall too far behind, the lender will likely seize the individual’s home as they have a scond charge over it, and then try to sell it in an attempt to recoup the money owed. The only other option is for the owner to try and sell the property while the court proceeding are continuing in the background, and the sale proceeds will pay off the loan.

Can a homeowner obtain any sort of protection from default?

You may purchase an insurance scheme if potential financial problems occur. The insurance company will essentially step in and start making payments on behalf of the homeowner if he or she becomes incapable of doing so. Keep in mind that maintaining such insurance means paying even more money.

Can I make overpayments?

Overpayments are in fact very much recommended. Paying off a secured homeowner loan quickly, means dealing with less accumulated interest. A homeowner should always pay at least the minimum, but strive to also pay beyond the minimum. The goal is to reduce the repayment time by as much as possible, and ultimately save more money.

Can I pay the loan off early?

You are welcome to pay off your loan ahead of schedule. To do this, you must speak with the lender directly, and request a settlement statement. The lender will calculate your outstanding balance, and add any additional fees to it and then report the total. The benefit of paying the loan early is you won’t have to deal with all the additional interest that would have otherwise accrued over the repayment period. Keep in mind that the lender may add some admin charges when settling early.

Does the interest rate change over the course of the repayment period?

The answer to this question depends on whether the loan is obtained with variable or fixed interest rate. Most secured loans come with a fixed rate of interest. This means that the interest rate will stay the same during the repayment period. Many factors can influence the rate, including supply & demand, inflation and issues within government. But you may be offered a much lower rate if your willing to gamble on a variable loan option.

Can I make repayments online?

Some lenders allow you to make their payments through the internet. These days, in fact, nearly all lenders permit it. This option also permits the homeowner to view his or her payment schedule way in advance of actual pay dates, also it can be more convenient than direct debt.

Can the repayment date be changed?

You can always request a change to your repayment date. However, the lender may need up to 10 business days to implement the change. Usually, lenders charge no added fees if the repayment date is moved backwards. However, if the date is moved forward, the homeowner may have to pay any added interest upfront to allow the change to work.

Glossary

What is LTV?

Loan to Value, also known as LTV, is a mathematical value that compares the homeowner’s outstanding mortgage on the home as a percentage value to the value of the home. Given that the home is worth ₤150,000 and the outstanding mortgage is ₤50,000 the LTV would therefore be 33.3%.

Outstanding Mortgage = ₤50,000
Home Value = ₤150,000
LTV : ₤50,000 / ₤150,000 = 33.3%

Generally, a lower LTV is a good thing, meaning a homeowner with a 25% LTV has a higher chance of securing a loan that of someone with 95% LTV. A lower LTV essentially tells the lender that you have already paid a lot of money into your property. It also tells the lender there is enough equity to secure the loan.

What is Equity?

Equity refers to assets that an individual owns. When dealing with homes, equity refers to that part of the home that the person actually owns. The interesting thing is that equity relates directly with your LTV.

The LTV equations looked like this:

Outstanding Mortgage = ₤50,000
Home Value = ₤100,000
LTV : ₤50,000 / ₤100,000 = 50%

Equity is an important factor some maybe financed up to 100%, meaning you don’t actually own any part of your home, and most likely will be declined for most loans.

What is APR?

APR stands for annual percentage rate. It denotes the yearly interest rate for the loan. There are two types of APR: nominal and effective. Nominal APR relies on just a simple interest rate calculation, while effective APR takes into consideration fees and compound interest calculated across the whole year. Its certainly a useful tool for comparing interesting rate charges with different lenders.

What is a second mortgage?

A second mortgage is simply a secured loan, taken after your mortgage. With a second mortgage, the security falls into a different security bracket, and takes on a “2nd charge” so your 1st charge mortgage will always be the most important. Any 2nd charge lender wishing to repossess a property would have to do so with permission of the 1st charge lender.

What is a default?

A default occurs when a loan goes too long without being paid, usually 6 months totals a default notice. In the case of a homeowner loan, a default can result in the immediate possession of the home to recoup losses. The individual might still be able to hold onto the property if he or she makes payments again. Otherwise, the lender will make all efforts possible to sell the home so as to recover the losses.

What is a secured loan broker?

In the financial world, a broker is an individual or company who mediates a transaction between two parties. He or she serves as the middleman. A broker is very much like a estate agent, when purchasing property, you usually need the help of a trained professional to effectively arrange the deal. The broker already knows everything about real estate, so it saves the individual from having to become an expert overnight.

What is a variable interest rate?

A variable interest rate is simply one that fluctuates year-by-year and sometimes even month-by-month. Lenders can offer what’s known as ARM interest rates. For instance, a 7/23 ARM interest rate means the interest rate will remain fixed for the first 7 years but then adjust itself to outside conditions for the remaining 18. Another type of ARM is the 4/7 ARM. In this scenario, the homeowner gets 4 years of fixed interest rates, after which the interest rate is readjusted every 7 months. The best type of interest rate option to choose depends entirely on both the economy and housing market.

Conclusion

A secured loan is a terrific loan option for any homeowner who owns quite a bit of equity in their home. And as long as your confidant your income will not stop flowing, it is ultimately a much better option than any other type of loan, due to longer repayment periods, and larger loan amounts lent.

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