Secured Loan Decisions
What are Secured Loans
Secured Loans are advances of money by a lender (the bank or finance company), to a borrower (you), usually for a fixed term of years.
You pay back the loan by monthly instalments over the term. These are often of an amount fixed at the start and remaining the same monthly amount until the loan is paid off, or in some cases of a variable amount, usually based on interest rates at the time.
What assets are they secured on?
To apply for a secured loan, you must have assets available, usually property, which you can offer as security, or collateral.
The property can be your main home, buy to let property, or business premises, provided they are acceptable to the lender as security.
Why are they secured?
The intention of securing the loan with an asset is to give the lender some degree of protection if repayments are not kept up. The lender has the ability to sell the property and recover their outstanding balance on the loan, before passing to you any surplus money received for the property.
With this degree of security, the lender is usually able to offer a lower rate of interest than for an unsecured loan, as the risk of the loan not being repaid in full is much less.
What are secured loans used for?
Secured loans are usually taken out to fund more expensive purchases, such as home improvements or extensions, a conservatory, for example, perhaps a holiday home, or for car purchase.
They are frequently used for debt consolidation, to enable existing loans and credit card debt to be repaid and take advantage of lower interest rates and longer repayment periods for this type of loan, which usually means lower monthly payments going forward, compared to existing credit card debt, etc.
Lending Criteria
Not suprisingly, lenders have certain restrictions and requirements on who can take out their loans and what they may be uased for, these are known as lending criteria.
All lenders require that the borrower must have an earned income, either from Employment or Self-Employment. Benefits and other receipts cannot be taken as earned income, so would not be eligible for a loan.
There can also be limitations placed on what the loan may be used for. Some lenders have no restrictions, so their loans are known as “any purpose”, others may be restricted to home improvements, or debt consolidation, or car purchase, or a combination of them.
How much can you get?
Loan to value is the maximum percentage of the value of the assets on which the lender is happy to lend. For example, if you have a house worth £100,000 and the maximum loan to value is 75%, you can borrow up to £75,000 on the strength of the value of the property.
Remember that this includes all existing lending on the property, in addition to the new lending. So, an existing mortgage of £50,000 would leave £25,000 of the LTV avaliable. remember this is not the only consideration, you have to be able to afford the repayments, too!
The other limits which can be encountered are the minimum and maximum amounts lenders are prepared to offer. It is usually possible to get a secured loan for any amount between about £1,000 and £100,000, depending on the various criteria to be met.