An unsecured personal loan is a small, fixed rate loan that is taken out for your personal use usually ranging between £1000 and £25,000 over an agreed period of time. As an asset is not secured on the loan the borrowing is dependent upon your credit rating. The credit rating or score will then determine which company will consider the risk the loan poses to them and the amount of APR (annual percentage rate) they will charge you on a monthly basis for that particular loan.
An unsecured loan is an option available to those who wish to raise finances for whatever purpose and do not wish to use their home or any other asset as security or who may not have sufficient equity upon which to secure a loan. It can be used for any purpose and can be a cheaper way to raise finance to pay off expensive loans or credit cards by consolidating all monthly outgoings into one easily affordable monthly payment spread over an agreed term.
If you rent your property, then an unsecured personal loan is realistically the only option as the property is not yours to be able to secure any borrowing against.
As the borrowing is not secured against an asset, the risk is left with the lending company, therefore someone with a good credit rating, proof of good financial management, possibly living at the same address for a number of years and who have some form of job security, will be seen as a good borrower as all of these points are seen as lowering the risk of default for the lender.
Although your home or assets are not at risk with a personal loan as they are in the case of a secured loan, lenders have still the legal right to recover any outstanding monies should payments not be made.
If the debt is small, but unpaid, lenders can arrange for a CCJ (County Court Judgement) to be issued against you. With further debt, bailiffs may be sent to your home to take away possessions to the value of the debt owed and sell them at auction.
In cases where the unpaid amount is high, the lender may take you to court which is expensive, unfortunately, you will have to cover these costs as well. In extreme circumstances, the court can rule that your home or property must be sold in order to repay the debt. The courts (in extreme circumstances) have the power to make you bankrupt as a result of non-repayment of unsecured loans
- Age: 18 to 75 years old
- Applicants : Single or Joint applications considered
- Min Loan/Max Loan: £1,000 – £43,000
- Representative Rates from: 7.0% APR
- Term : 13 to 180 months
- Self-employed : Decision upon application
- C C J’s: Guarantor Loans only
- Debt Management: Guarantor Loans only
Minimum income: £700 per month Take home pay
Tips for borrowing
- Only borrow what you can afford to repay.
- Draw up a monthly budget; this will help you to manage your finances on a monthly basis.
- If you do find that you are struggling to make your repayments, do not ignore the problem, talk to your lender about options available to you such as extending the loan term so that the monthly repayments are lowered, it is also possible to seek advice from the Money Advice Service: moneyadviceservice.org.uk.
*Representative 15.8% APR (Variable)
Representative example: If you borrow £7,500 over 3 years at a Representative APR of 15.8% and an annual rate of 15.8% (fixed) you would pay £259.11 per month. Total charge for credit will be £1,827.96. Total amount repayable is £9,327.96.
What is a secured loan?
It is a loan only available to property owners (or mortgage holder), where the lender can forcibly sell your house to get its money back if you can’t repay. The lender gets security of the loan being repaid if there are problems as they can repossess your home to get their money back.
Normally personal loans from a bank or building society are unsecured, which meaning there is no automatic link to your home. It is also the only way non-homeowners can borrow money.
It is becoming a fact of life today that for those in financial difficulty even the unsecured lenders can get what’s called a ‘charging order’ on your home. This effectively means they can claim any money owed from the sale of your house whenever the sale takes place in the future.
This doesn’t automatically mean the lenders can push repossession though, there is another court stage they would have to go to beforehand and the courts are much more reticent to grant it on charging orders for an unsecured loan.
If everything is equal, an unsecured loan is always preferable to a secured one.
Why take on a secured loan?
- Easier to obtain – In the main an unsecured loan is usually cheaper for those with decent credit scores, however as secured loans provide lenders with additional security they are more willing to lend to clients who may have a poorer credit score.
- larger borrowing is possible – The maximum unsecured loan is £35,000 yet secured loans can be anything from £3000 up to £250,000 and can be used for any legal purpose
- Borrowing over a longer period – Secured lenders can provide loans over a longer period of time, usually from five to 20 years. Unsecured lending is usually only one to seven years. Borrowing for longer does reduce the monthly repayments, but substantially increases the total interest repaid.
Admittedly secured loans are not an easy option for those with heavy debts and your home isn’t something to gamble with. The only good reason for using them is to cut existing debt costs. If you are considering taking out a secured loan for new borrowing or a major purchase should not do it and need to take further advice.
Checklist before considering a secured loan
Credit card balance transfers
Credit cards are unsecured borrowing. When used correctly it is the cheapest borrowing possible, especially when shifting debts to a new card by means of a balance transfer.
As discussed on a previous page these are cheaper and less risky for those who can get them.
Check the credit reference files
Clients who are rejected from being able to get an unsecured loan and are not obviously aware of having a poor credit history should check their information held by the credit reference agencies such as Equifax, Experian and Call Credit isn’t erroneous.
The interest paid on savings is usually far less than interest charged on borrowing, so paying off debts with savings makes sense. However as most people have previously used up any savings they may have and most have less than a month’s salary saved anyway, it is a mute point somewhat.
Traditional logic does say always have an ‘emergency cash fund’.
After paying off debts, don’t cut the credit cards up, lock them away in case of a major emergency, you never know when it may be needed. You can then start a cash emergency fund
Reviewing your existing Credit card
It’s possible to cut the interest rate on your existing debts even without getting a new credit card. Many card providers allow existing customers to move other debts to them at special rates. Correctly shifting balances and prioritising repaying expensive debts first can potentially create substantial savings.
Mortgages in simple terms are a special type of secured loan with cheaper rates. Borrowing the money on your existing mortgage, or re-mortgaging to a new cheaper deal can be a valid option. Mortgage debts are paid off over a long time, and 5% over 20 years is more expensive than 10% over five years. It is always best to seek independent mortgage advice to find out what is best for your circumstances.
Those without flexible mortgages (which allow quick repayments) may sometimes be better off with a secured loan.
For those consistently struggling with debts and meeting repayments, free personal help is invaluable. Do it as quickly as possible, the longer you leave it the worse it gets. Try our free debt calculator to see if you qualify for free debt help.
Getting a secured loan
How much should you borrow?
List all of you existing debts on a piece of paper and work out those debts you feel you can pay off without consolidation. Once you know the secured loan rate, work out where this fits in as to costings. A secured loan should only be considered to pay off the more expensive debts that you feel you would not be able to manage otherwise.
You’re converting a fixed rate into variable rate debt
While most unsecured loan interest is fixed for the life of the loan, a secured loan is usually variable and can move with UK base rate which has not moved upwards for several years, please bear in mind that can change during the life of any future loan.
If you’re considering converting fixed rate debt such as a standard personal loan into a variable rate one, always ask “could I afford the repayments if rates increased?. If not, don’t do it. Some secured loans offer rate fixes, which may be for only a limited period.
And most importantly if you think you won’t be able to make the repayments, don’t even go down this route, it isn’t worth it – speak to one of our debt counsellors instead.
How long to borrow for?
Budget to work out the maximum realistic amount you can commit to repaying, use a budget planner to help. Don’t underestimate or it’ll take longer to repay, costing more interest; and don’t overestimate or you may overstretch yourself, risking your home. Careful planning is crucial.
How much does it cost?
The interest rate offered depends on the loan size, length, your ‘credit score’ as well as the amount of available equity remaining in your home. Lenders assess these factors in different ways. A particular loan may be cheaper for a client with a good credit score but with limited equity whilst uncompetitive for someone with a poor credit score with high equity in their property. Sadly house price falls in recent years has meant many people now have a reduced amount of equity in their property. The bigger the amount of equity in the property the better the rate offered will be.
What is the worst that could happen?
You can lose your home! However, thankfully, it is less profitable for most secured loan companies to repossess homes than to have the debt repaid. If you are unable to make a payment, or you fall behind with repayments then it is advisable to notify the lender immediately as it maybe possible to renegotiate the remaining repayment schedule with them.
Failure to repay does have an immediate negative impact on your credit score, lenders’ letters informing of arrears are quite often charged for which is added to your account which adds further interest and costs to the outstanding loan.
- Loans from £3000 to £250,000 (up to £2.5m on referral)
- Competitive rates
- LTV’s (loan to value) up to 95% and some lenders offering over 100% LTV lending.
- Terms from 3 to 30 years available
- Lending to employed, self-employed, multiple incomes, 0-hour contract workers, clients with partial benefits or pension income.
- A viable alternative to a full re-mortgage (for those who may not want to re-mortgage because of a low rate or high early redemption charges)
- Where a re-mortgage is unavailable for reasons of LTV (loan to value), adverse credit or credit score, 2ndcharge lenders often have a compliant solution for these situations.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
What is a remortgage?
Essentially a remortgage is a way to re-finance an existing loan secured on a property. It allows you to pay off your existing loan either with a new mortgage from your current lender that is on a better rate or through an altogether new mortgage provider. As long as your own personal circumstances permit a re-mortgage can be arranged for many reasons, the main ones being moving across to a better deal to save you money or raising additional funds which can then be used for any legitimate purpose.
Why should you remortgage?
- If you’re struggling to pay off a number of outstanding debts which are starting to become more and more difficult to manage then a Remortgage, using the equity built up in your home, could be the answer. Our selected partners are whole of market brokers who will then help and advise you by looking at you circumstances as to the best method to combine all your loans and outstanding credit into just one monthly payment. It may even be possible for you to have some cash left over to spend as you wish.
- With a Remortgage you can borrow any amount from £25,000 to £500,000, over 3 to 25 years. Allowing you to restore your credit rating by showing lenders that you will pay your debts allowing you to enjoy one, much more manageable, monthly payment. However, please remember that extending your debt over a longer period could mean you pay more interest and the total you repay will be higher.
- Your current deal is about to end. Many of the best mortgages only last a short time – often two to five years – the typical length of time offered on a fixed rate, tracker or discount mortgage.
- When it comes to an end, your lender will put you on to the companies’ standard variable rate (SVR) which is likely to be higher than your old interest rate, possibly even higher than the best buys available at that time. If so, you want to be ready to remortgage to a cheaper rate. Start looking around 14 weeks before your rate ends.
- You want a better rate. If you are tied into an initial deal then you might have to pay an early repayment charge which can be a hidden cost and can be as high as 2-5% of your outstanding loan. There is usually a small exit fee (it might be called an ‘admin fee’ or a ‘deeds release fee’) which is payable whenever you repay any mortgage back. If this is the case it may be worth holding off looking at a remortgage until the term of the early repayment charge at least has expired. There may be other options to raise capital which may answer your requirements such as a secured or unsecured loan. Our mortgage broker partners will be able to advise you on the best course of action.
- Your home’s value has gone up…a lot. If the value of your property has risen rapidly since you took out your mortgage, you may find that you are in a lower loan-to-value band, which may make you eligible for much lower rates. Again, you need to do your sums but it’s definitely worth a discussion with our mortgage partners.
- You’re worried about interest rates going up. Before you panic, you need to check what is meant by rates going up. If it’s the Bank of England base rate that is predicted to go up, this may affect your mortgage payments directly, depending on the type of mortgage you have. If it’s the rates that new customers are being offered, then this doesn’t automatically mean yours will be affected
- You want to overpay & your lender won’t let you. Perhaps you’ve had a pay rise or maybe you’ve inherited some money. You now want to pay extra but your current deal won’t let you or it will only let you make a small overpayment. As they say the devil is in the detail. Speak to our mortgage partners who will be able to advise you of the right action to take for you
- You want to switch from interest-only to repayment mortgage. You shouldn’t actually need to remortgage to do this, your existing lender should be happy to make the change for you. You can even change part of the loan to capital repayment and leave some on your interest-only deal, which is particularly useful for anyone with an underperforming endowment mortgage which is expected to result in a shortfall at the end of the term. However, if you want to change from capital repayment to interest only – expect your lender to resist or refuse to do this as in times of low interest rates the lenders would like to see that the loan is being managed towards an end date.
- You want to borrow more. Perhaps your current lender has refused to consider lending you extra money or the terms being offered are not as good as they could be. Remortgaging to a new lender might enable you to raise money cheaply on low rates. But remember to take all the fees into account to see if it really is cheaper than other forms of borrowing. Speak to our mortgage broker partners to see how this could work for you.
- A new lender will ask you what the extra money is for. Surprisingly, it is likely to be more comfortable with you borrowing the money for a new car than for business purposes.The most commonly acceptable reasons to raise money are for home improvements and paying off other debts. Just be prepared for your lender to ask for evidence if you are borrowing a large amount, e.g. builder quotes, or proof that you have paid off the debts.
- You want a more flexible mortgage. Maybe you want to be able to miss a payment (payment holiday). Changing jobs, going back into education, going travelling – whatever the reason, there are mortgages which will suit your particular requirements.
Or maybe you’ve been tempted by different mortgages which combine your savings or current accounts with your mortgage. Whatever flexibility you want in a mortgage, the chances are it’s out there. But remember products don’t offer these additional for free. Expect to pay for flexible features with a slightly higher interest rate. So don’t be tempted to go for bells and whistles unless you will actually use them.
When a remortgage may not be the right thing to do
- The mortgage debt is really small. Once the loan falls below a certain amount – around £50,000 for instance – it may not be worth switching lender simply because there it is less likely that there are savings to be made especially if the fees are high. Some lenders won’t even take on mortgages below £25,000.
Do have a look but you’ll probably want to look at rates with a small fee, or no fee at all. The smaller your mortgage, the worse the effect of any fees you need to pay. Quite often, it can be economically sensible to remain on the higher interest rate. Speak to our mortgage broker partners to see if this is the case for you.
- Your early repayment charge is large. A large early repayment charge could mean that it would be a folly to move before the end of the incentive period. Do your sums to find out If it costs too much to remove yourself from your current deal, then it’s all the more important that you do your homework, and be ready to move as soon as you can.
It’s always worth asking your current lender to let you switch (product transfer) to another deal within their existing product range by paying a reduced early repayment charge. You’re unlikely to get to move to its top-of-the range deal but as long as it’s better than the one you’re currently on, and doesn’t lock you in for much longer, you have nothing to lose. Take advice before committing to any action.
- Your circumstances have changed. Client financial circumstances change all the time so it is possible that your own financial position has altered since you took out your current mortgage – for instance, one of you has stopped working or you have become self-employed. Speak to our mortgage broker partners to see how they can help you to make an informed decision.
Stricter mortgage rules introduced in April 2014 know means that lenders MUST now see evidence of your income. New lenders may not be prepared to offer you a loan because you no longer fit their criteria, meaning you may have to stay where you are. This may mean a need to shop around to find a lender sympathetic to your circumstances and our mortgage broker partners can help you with this.
- Your home’s value has dropped. When you first purchased your property you may have had a 10% deposit resulting in a good mortgage product at that time. In today’s market, house prices have dropped across the country so it’s possible the amount you owe is a bigger proportion of the house value. You have become a victim of evaporating equity, even if you have been making repayments, and that can hurt you. In some cases, you may be in negative equity, where your debt is higher than the value of the property. Please remember we all have to live somewhere, it’s a paper loss or a paper gain until we come to sell the asset and it’s only at that point in the process that we make a gain or a loss. Speak to our mortgage broker provider to see if they can help meet your aspirations.
- You’ve had credit problems since taking out your last mortgage. Since the credit crunch, lenders have become much more critical as to who they lend to and how much. The regulator, the Financial Conduct Authority, now also requires mortgage providers to carefully check that any mortgage they offer is affordable, not just at current rates, but at a higher rate too, to ensure you could cope if interest rates were to rise (rate shock).
As a result, lenders now require far more detail about your incoming and outgoing. They are looking for well managed repayment histories as well as a clean record of handling debts.
It might only take one recently missed payment to your credit card, loan, mortgage or utility provider…even your mobile phone to seriously damage your chances of a particular mortgage lender providing you with the funds. By speaking to our mortgage broker partners this risk can essentially be reduced.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
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