Steps to follow prior to committing to a Secured Loan

Introduction 

Secured Loans have their place in the market. They might be advisable for people with bad credit ratings who are unable to extend their mortgage or for those who want to take out a large loan, particularly over a longer period. For people with reasonable credit scores they can also offer quite a low cost way of borrowing money.

The problem is that as a Secured Loan is, by definition, 'secured' against a property they should be seen as a last resort for those at the bottom of the credit pile. This article will look at other ways of raising money or, at the very least, ways of reducing the monthly cost of interest on the money you owe.

Credit Cards Shuffling

There's a myriad of Credit Card Companies out there and they're all vying for your business. The reason why they spend masses of money on promotion and fighting for your business is because the Credit Card business is very profitable. For those struggling against debt signing up for another card or increasing a Credit Limit is one of the easiest ways to get extended credit, but please, please consider a few things before you do this.

The first thing to consider is, ringing up your existing Card provider and telling them that you have seen more competitive card rates and you are considering moving. Remember they spend a lot of money attracting new Customers and with any they already have they don't mind losing out on a little bit of profit just to retain them. The people you speak to at the call centres have a reasonable amount of power to authorise a new deal.

If you have more than one card then the second thing to consider is transferring the balances to the card that will offer the cheapest interest rate. Gone are the days when Credit Card companies would only give cheap balance transfers to attract new customers - most now have 'special offers' for existing cardholders too. One thing to check though is how the repayments will work on the card that the balance is transferred to. In a lot of cases you find that the monthly repayments will be geared to paying off the debt with the lowest interest rate, meaning that all new debt sits there attracting a higher rate of interest. (This used to happen a lot with the 'zero rate balance transfers' where in the long run the new credit card company made fatter profits on any new debt added to the card). To do this method just ask your card providers whether they accept balance transfers, what the APR will be and check that your credit limit is high enough to accommodate the transferred debt. Also bear in mind that if you have an overdraft you might be paying interest at a higher rate than a credit card - so it might be cheaper in the long run to get cash against a credit card and use it to pay off your overdraft.

The third thing to consider is to make sure that you always pay off the most expensive credit card balance (including your overdraft) first. For example, if one is charging you 16% and another is charging 11% then just pay the monthly minimum to the one charging the low percentage and throw any spare cash you can at the one with the higher rate. If your borrowings are significant, then so will the savings from simple following this simple exercise.

An Unsecured Loan

Although it probably won't provide as much capital as a secured loan looking around for an unsecured loan prior to taking out a secured loan might be advisable. In this day and age lenders are less concerned about County Court Judgements and slightly adverse credit records, but one thing to watch out for is the advertised APR. Lenders advertise using what is called a 'typical APR', what this means is that at least two thirds of their customers are on average charged this rate. There are two problems here - one is that if you have a poor credit history they are likely to charge you considerably more than the advertised rate and the second problem is that you won't know what rate they will charge you until they actually process your loan application. The problem here is that a 'dirty great footprint' is left on your credit history file for every search conducted on it.

There are another couple of things to watch out for when applying for an unsecured loan. One is the period that you take to repay the loan, repaying over a longer time might make the monthly repayments be more manageable, but you will pay much much more in interest for a longer period loan. Another thing is getting the money early - some loan companies advertise they will get the money in your account 'the next day' or whatever, but watch out for sneaky fees when they do this.

One last thing to mention is payment protection insurance (PPI). Loan companies make a lot of their profits from people signing up for PPI, but they don't tell you all the details in the small print. Things to look out for are - there's normally no payment made if you get a bad back or suffer a 'mental' illness. There's sometimes no payment if you are made redundant within a specific period of taking out the insurance and some companies only use jobseekers allowance as a measure for you being unemployed. The problem here is that you might not be entitled to jobseekers because of a redundancy payment and even though you are physically unemployed the PPI doesn't kick in. Other things to read in the small print are 'no refund' policies if you settle the loan early.

Mainstream Mortgage or Sub Prime Mortgage

This is where it gets even more complicated! You will find in the finance world there is no hard and fast definition of anyone or anything. For example, some writers and commentators call the 'Secured Loans Market' the 'Sub Prime Market' whereas others call the 'Sub Prime Market' the players in the mainstream market who take on risk adverse borrowers. For clarity, I would use the following definitions of the three different types of loans where you secure the repayments against your property. The first is a mainstream mortgage - this is a standard mortgage for borrowers typically with a good credit rating and they will probably get a reasonably low interest rate. The second is a sub prime mortgage - this is for people with a slight problem with credit - they may a history of missing payments or have had county court judgements against them - they will be charged a higher interest rate and will probably be 'locked in' to a mortgage for a fixed period (typically 3 years). The third is a secured loan - although there are sometimes reasons for people with a good credit rating to apply for them, they are typically for people with a poor credit rating and for people who have been refused money from the mainstream mortgage or sub prime lenders.

So now that's settled, lets look at what the options for someone with a poor credit rating are. The first is don't think that, just because you have a few bad marks on your credit file, you won't be able to re-mortgage in the mainstream market. In recent times the increase in sub prime lending (including secured loans) has outstripped the main market and because of this, the mainstream market has relaxed its rules slightly on lending to people who are 'slightly risk adverse'. What this means is that if you have just missed a couple of repayments on you existing mortgage or have a country court judgement against you which is over, say, a year old you may be still be able to get a lower interest mortgage from the mainstream. Nowadays, mortgage lenders also frown less on people's circumstances, so if you otherwise had a good credit history but it lapsed recently only through something like divorce or redundancy they might still consider you.

If you are refused a mainstream (or sometimes called prime) mortgage the next level you can try is the sub prime market. The sub prime market will take you on if you have a reasonably bad credit rating, but as with all things in life, there are things to be wary of. One thing is if you go directly to someone who deals exclusively in Sub Prime, they may be unaware of the offerings in the Prime market, so if you are negotiating a mortgage package always ask them what the prime options are and at the outset make sure you know which type of lender you are dealing with.

Be wary of the interest rates offered by Sub Prime lenders. In some cases their initial interest rate for the first three years or so may be less than a competitor, but always ask them what happens after the end of the three years. You sometimes find that part of the agreement of getting the Sub Prime mortgage is that they tie you in to a higher rated interest mortgage for another period after the Sub Prime one ends.

That's not to say there aren't one or two good Sub Prime solutions out there. Some lenders will review your situation at the end of the term and it is entirely possible that your credit rating will have improved enough for you to make the switch back to a Prime mortgage. Debt Counselling

If you ever find yourself in financial difficulties it is well worth seeking some independent advice. As some of the explanations in this document more that prove - the finance market is a very complicated world and sometimes specialist advice is called for. In the counselling world there is the good old Citizens Advice Bureau (CAB) who have many sites scattered across the country and you can just pop in for advice or, more commonly, book a specific appointment, but there are also some less known bodies offering advice. There is the Consumer Credit Counselling Service (CCCS) and the National Debtline, both of these offer telephone advice and send out information packs and 'budget planners' to those in financial difficulty. Where they differ to the CAB, is that they specialise in giving advice to people with debt problems, and one little irony is that they are paid for by the Consumer Credit Industry.

Summary

It is always better to consider your options when taking out any loan, not just a secured loan. Other things you can do, not mentioned in this document, are talk to an Independent Financial Advisor, talk to friends and family and see if you can borrow the money, or see if you have any assets to sell that could get you over the rough period - you never know it might be shorter than you think.

But always think very carefully before committing to any financial transaction and always research what you are signing up to - and watch out for the small print.