For home owners, borrowing money seems almost too easy. But secured loans, or home owner loans, which may put your home at risk in the future, are not something to be considered lightly; as I discovered recently when I found myself in need of a substantial sum of money which I simply did not have. Fortunately I did have enough time to do my homework and seek professional advice before proceeding. Being in charge of the facts gives you confidence and helps you to ask the right questions.
I looked into the possibility of unsecured loans first. These are usually personal loans from a bank or building society and are not automatically linked to the home, making them accessible to non-homeowners. However in the current economic climate, I found that many lenders looked for a ‘charging order’ on property, which essentially gave them the same rights as lenders of secured loans – i.e. if payments were not met, they could demand their money from the sale of the home.
Unsecured loans have much shorter repayment terms than secured loans - usually a maximum of seven years; whereas secured loans allow much longer. In fact because of the costs of setting up secured loans for lenders, they actually prefer these to be long-term - anything up to twenty years. Longer repayment times mean smaller monthly payments, but they also mean considerably more in total interest charged.
The first thing was to be strict with myself about the amount to be borrowed and not to ask for a penny more. Unsecured loans, when they can be found in these difficult economic times, normally have an upper limit of £25,000 whereas secured loans can go up to as much as £75,000. Because of this it seems all too easy to add a few thousand extra for a holiday or other non-essentials. What I had to remember was that the more I borrowed, the more I would have to repay.
The interest rate was something I had to think seriously about. With an unsecured loan, interest rates can be fixed for the duration of the loan, as this is only a few years. However, with long term secured loans, the rates will fluctuate with the base rate and changes in lenders’ policies. Interest rates may be low at the moment but we all know how quickly these can change and in five or ten years I could be paying considerably more.
I would like to have had the option to pay the loan off sooner, should our personal circumstances change, but I was advised that this would not be possible. This is because ‘redemption penalties’ are included in the terms of secured loans. These prevent you from paying off your debt earlier and, in trying to do so, you could incur a fine. It was useful to know this and again ensured that we only borrowed exactly what we needed.
One interesting fact I learned was the importance of a good credit score and how to achieve this. Having a good credit rating makes taking out unsecured or secured loans so much easier. Simple things like keeping up regular payments on credit cards and not leaving small debts behind when you leave an address can all help your credit score significantly.
Taking out a loan should never be considered an easy option. It is a serious matter and should be given a good deal of thought. There are debt counsellors available who offer free personal advice and information about the best way forward if you find yourself struggling with debt. There are also excellent internet advice sites and it is always worthwhile doing your homework and checking out all avenues before embarking on a loan that could put your home at risk.
Author Resource:
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