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The 411 on Secured Loans: What you need to know
Any time someone borrows money from a bank, the funds lent are referred to as a loan. Any time when the bank asks for collateral (a security that the bank takes charge of if you are unable to pay, like your home or property), thats called a secure loan. A first secured loan on property is considered to be first charge, while a second loan (perhaps a home equity or second mortgage) is second charge. Secured loans are easier to obtain than an unsecured loan, as the bank has a means of repayment in the event that you are unable to.
There are many types of secured loan programs available, offering different benefits and such to the borrower. But no matter which one you choose, there are some things you need to know before you agree to or sign anything.
First, secured loans come in a variety of amounts (typically averaging between £3,000 to £50,000, but have been seen as high as £250,000 with some lenders). They are repaid on a monthly basis for a predetermined amount of time (usually between 3 and 25 years). Some loan programs may have a prepayment penalty (a fee attached to the loan if it is paid off earlier than expected), so be sure to ask your lender if this applies to your loan.
Second, the APR (Annual Percentage Rate) is the interest youll be charged for borrowing the money. Your APR will depend on several factors, including your credit history and equity available in the property. Its a wise idea to compare interest rates from different lenders to be sure that youre getting the best one possible.
Next, you need to know how to apply for a secured loan. The Internet revolution has changed the lending industry for the better, as its no longer necessary for you to leave your home to apply for a secure loan. Although you can visit your local branch of your favorite lending institution, its much easier to login online and enter your information, or to pick up the telephone.
Finally, you need to know how governing laws are protecting you. All secured homeowner loans are subject to the Consumer Credit Act of 1974. This act contains strict guidelines as to how money is lent out, covering loans up to £25,000. (Loans for greater amounts are unregulated). Before such a secured loan is granted, you will have to sign a legally binding credit agreement for the terms of your particular program. A consideration period of 7 days is to be granted to you by the lender. Lenders are to offer you insurance options to cover your monthly loan payments in the event that you are unable to pay under specific circumstances, such as illness, unemployment, an accident or death. All coverage options will vary between lenders, and so will the cost, so be sure to check with your lender for any details, specifically as to what is covered and what is not.
Working Out The Total Cost Of A Loan
When you are looking for a loan, you need to compare loans by working out the total cost of repaying the loan. Although many web sites allow you to compare the APR costs, working out the real total cost of a loan is a little more complicated. However, it is important that you do this so that you can budget accurately and also so that you can find the best deal for your needs.
Estimating the total cost
The quickest and easiest way to estimate the total cost is to multiply the total amount borrowed by the APR, and then multiply this by the number of years. For example, if you borrow £10,000 and the APR is 10% for 5 years, then 10000 times 0.10 times 5 equals £5000. This is the interest you will pay, so add this to the total amount borrowed and then you know to borrow £10,000 for 5 years at 10% costs you £15,000 in total. Of course, this is only an estimate and will be higher than the actual amount as interest payments are reduced as you pay off the amount.
Other costs
There are obviously other costs to add to this total amount, such as loan processing fees, payment protection insurance and any other fees you need to buy to set up the loan. Add these to the total cost mentioned before and you have the total that you need to pay back over the loan term.
TAR
If you are discussing the total cost of the loan with your lender, then ask them to give you the TAR. This stands for Total Amount Repayable, and will let you know the total you have to pay back during the loan term. The difference between the amount borrowed and the TAR will tell you how much the loan is costing. A smaller difference between these two numbers means a better deal for you.
APR
As well as knowing the TAR, you should work out how much you need to repay each month. To do this, divide the TAR by the total loan term in months. For example, if you were paying back £14,400 over 12 years, then you will pay back about £100 a month (14,400 divided by 144 months). Of course, this is also an estimate as the TAR amount you have calculated is an estimate. To get the exact amount, ask the lender.
Adding penalty costs
When working out the total cost of a loan, you should budget into the equation some penalty fees. Although you might never pay any of these fees, to allow for a few late payments will help you to be prepared in case. It may also help you to decide between two similar loans, depending on the amount they charge for penalties and late fees.
If you are unsure, seek advice
If you are looking for a loan and are still unsure how much you will need to pay back over the whole term, then consult an independent financial advisor, who can help you work out how much you are paying for each loan, and which is the best deal.