Secured personal loans
Home a-loan?Secured loans are often overlooked by mortgage brokers, but they provide a viable option for many borrowers and the market is cleaning up its image
Like the England football team, secured personal loans are a popular target for criticism. There are a number of key issues that need to be addressed, but what is not needed is for the sector to be given the same sort of rough ride in the media that dear old Sven has had to endure. It is with alarming regularity that industry experts come out with comments such as there is not a single instance when a secured loan is a better option than a mortgage.
Yes there is. Take, for example, a borrower who wants to raise an additional £9000 and who already has a mortgage with a competitive rate of interest, with a traditional high street lender. If, during the term of their mortgage they have experienced financial difficulties and have a history of arrears, they may find it difficult remortgaging to another mainstream lender at a comparable rate of interest. Their only option may be a sub-prime mortgage with a higher overall rate of interest. In these circumstances they may be better advised to hold on to their existing low rate mortgage and apply for a secured personal loan to raise the additional capital.
Special circumstances
There are also a number of other circumstances when a secured loan may be a better deal than remortgaging:
When a borrower has a mortgage with a competitive fixed or discounted interest rate – with early redemption penalties to pay for early settlement .
When a borrower wants to apply for a loan over a short period of time – with a remortgage they will incur upfront fees, such as valuation fees, application fees, legal fees, lenders references and possibly higher lending charges, and the loan will be repaid over the term of their mortgage – typically up to 25 years. This can make the total amount of interest payable quite high. Secured loans usually have no upfront fees and the loan can be taken for a shorter period than the main mortgage. This can make it a cost effective way to raise short-term capital.
When a borrower wants to raise additional capital quickly – secured personal loans can usually be completed more quickly than mortgages, because once an application has been submitted to a lender, the loan can potentially be paid out in 48 hours. With a mortgage it takes longer due to the offer of advance and completions process.
When a borrower wants to clear existing debts quickly – with interest rates on secured loans starting from 7.7%, it makes sense for borrowers to consolidate existing more expensive debts, like credit cards and unsecured loans, into a single cheaper loan. Secured loans usually have no upfront fees and can be repaid over shorter periods, making them ideal for this purpose.
The key issue is that brokers need to consider all the options that may be appropriate for their client – mortgages, secured loans and unsecured loans. All three categories of product have a valid role to play in the market and simply recommending the tried and trusted option of a remortgage is not good enough.
Interestingly, most loan brokers have specialist mortgage and unsecured loan teams as part of their business. They assess the clients' needs and then recommend products accordingly. And every day they broker mortgages and unsecured loans, as well as secured loans.
Contrary to popular myth, loan brokers do not simply try to sell the most expensive deal available. At Freedom, for example, there is a sophisticated loan placement system, which matches clients' details against the specific criteria of every lender on its panel. It then shows, immediately, which lenders will accept the deal. The system is fast, efficient and works in the best interest of borrowers.
This is not to suggest that the loans industry is squeaky clean and without any blemishes. There are issues and the main one is regulation. The industry needs to be regulated to put it on a level playing field with the mortgage industry and the sooner the better. It is, however, only a matter of time and there have already been significant changes to the way in which it is governed.
Product issues
There are also product issues to address such as the sale of single premium ASU insurance which, historically, has been sold alongside secured loans. Single premium ASU has been on the receiving end of the sort of press coverage that Sven is currently experiencing, but that does not mean the concept of a product with a one-off premium is a bad idea.
Given the credit profile of typical secured loan borrowers, taking out insurance cover which is paid for up-front and will not therefore get cancelled has a lot of merit – as long as the cover represents good value for money. Many loan brokers are currently restricted to selling the ASU products provided by the loan companies they deal with and wholesale change is not going to happen overnight. But change will happen.
The secured loans industry is not without its faults, but neither is the mortgage industry. Secured loans have a valid role to play and most mortgage brokers are guilty of not giving secured or unsecured loans due consideration before opting for a mortgage
This article has appeared in Mortgage Solutions Magazine.
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