FEATURE: Is it safe to secure?
Secured loans have taken a bit of a beating in recent years – but in the wake of the credit squeeze, are they getting more of a look in? Kate O’Raghallaigh finds out
Traditionally seen as nothing more than a last resort for struggling homeowners and tainted further by questionable TV advertising, secured loans have rarely been considered a cost-efficient way of getting out of debt.
However, over the past six months there has been an 85% increase in the demand for secured loans, driven by rates on personal or unsecured loans becoming less competitive, according to price comparison site MoneyExtra. Its research shows that homeowners looking to borrow £15,000 can get rates of interest as low as 5.9% – 2.5% lower than the rate on the average personal loan for the same amount.
A secured loan is a loan that is backed up by an asset, usually property. Because a lender has the right to your property if you default on your loan repayments, a secured loan enables you to borrow a larger sum of money than a personal or unsecured loan would normally allow. The added risk, of course, is that if you default on your loan repayments you could potentially lose your home.
The rate of interest on secured loans has traditionally been more competitive than rates on personal loans. They have a shorter repayment period (normally no longer than five years), and the debt is not secured on an asset, so they tend to charge a higher rate of interest.
Comparing the cost
In the wake of the credit squeeze, however, tightened lending conditions mean that personal loans (along with mortgages and a host of other financial products) have now become even more expensive and being approved for one is more difficult than it was in the past.
Tim Moss, spokesperson for price comparison site Moneysupermarket, says: “The interest rates on personal loans have gone up quite a bit over the past year, meaning that the gap between the repayments on each type of loan is beginning to close. Every one of the top 10 most competitive personal loans at the moment, for example, would not have been near the top 10 at this time last year.
“Unless you have an immaculate credit rating, you will find it really difficult to get approved for a personal loan at the moment. While secured loans used to be something of a last option for homeowners, many people are choosing them because they have a better chance of being approved.”
For example, a market leading personal loan of £15,000 from Moneyback Bank, taken out over a period of five years, has an APR of 6.7%, leaving the borrower with monthly repayments of £294 (according to Moneysupermarket). A market-leading secured loan for the same amount, taken out from Fairandsquare over the same time period, amounts to a typical APR of 6.9% with monthly repayments of £295.
The small difference between the monthly repayments on the two types of loan means that, for many people looking for ways of managing their debt, secured loans may now become less of a last resort. However, according to Francis Walker, spokesperson for debt charity Credit Action, comparing personal loans with secured loans is not a good idea. She says: “You’re not really comparing like with like – you might as well be comparing apples and pears. There is a lot more to consider than the rate of interest.”
Taking out a secured loan brings with it a risk that doesn’t apply to personal loans – if you default on secured loan repayments, you could be putting your home at risk. Walker advises borrowers to carefully consider their options. She explains: “The rates, and consequently, the repayments on a secured loan might be lower, but it is a far riskier loan and we would still advise borrowers to think twice before taking one.”Moss, however, says that homeowners who have built up equity in their property should make use of it. He continues: “Why not benefit from the equity in your property? While we would warn homeowners not to be lured into thinking they can borrow more equity than they need to, as long as you keep the term of a secured loan to the same length as a personal loan and you can afford to meet your monthly repayments, there’s no reason why a secured loan should not be a viable option.”
It goes without saying that when it comes to sourcing solutions to your debt, there is a lot more to think about than just the rate of interest. Cheaper repayments and the facility to borrow more against your property’s value if you need to, (or just feel like it), might seem appealing. However, the downsides of secured loans – such as potentially putting your property at risk, and accruing more interest if you take out a loan over a longer term – also need to be given due weight when choosing between the two types.
Getting out of debt is not an easy process, especially in the current economic climate. If you are on the hunt for that loan, make sure you you weigh up your options carefully at each part of the decision-making process, so your getting your finances back on track is as stress-free as possible.
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