:: SECURED LOANS :: Borrowing FAQ’s This section is designed to answer a series of frequently asked questions on borrowing. When will a secured loan be preferable to increasing my mortgage, re-mortgaging or obtaining an unsecured loan? What's the best way for me to borrow? What is APR? What special protection do I get if I buy goods or services using a credit card? When will a secured loan be preferable to increasing my existing mortgage, re-mortgaging or obtaining an unsecured loan? Further Advancing - Potential Problems Benefits of Secured Loan Insufficient income (based on multiples) Purpose of loan may be unacceptable The applicant may be in arrears with their lender More generous income criteria – affordability calculation Most legal purposes accepted as purpose of loan Arrears considered on most plans Re-Mortgaging - Potential Problems Benefits of Secured Loan The client may be tied to a fixed/discounted mortgage rate which may incur a redemption penalty if redeemed during the fixed/discounted period. Possible valuation, broker and legal fees. Insufficient income (based on multiples) Purpose of loan may be unacceptable. Could take 6-8 weeks to complete. The client may be currently in arrears. Which means that they could only re-mortgage with a sub-prime lender at a higher rate. First mortgage can be left in place and additional funds can be raised by way of a secured loan. Secured lender will pay for all valuations and references. In some cases there is a broker fee and legal costs, but these can be added to the loan. More generous income criteria – “affordability” calculation. Most legal purposes accepted as purpose of loan. Two weeks to complete. Can be as little as 3 days. Secured loan could be arranged with the borrower able to keep existing mortgage at “High Street” rates. Unsecured Loan - Potential Problems Benefits of Secured Loan Normally restricted to shorter term 5yrs – 7 yrs which means a higher monthly payment. All applications credit scored which often results in many declines. Advances normally restricted to £15,000 – often considerably less particularly with any adverse credit. Clients can borrow between 5yres -25 years. More flexible criteria. Can borrow from £5,000 to £250,000 Go to Top of Page What's the best way for me to borrow? Should I use a credit card, personal loan, HP, overdraft, store card, interest-free credit, catalogue, secured loan, or a credit union? Different methods of borrowing suit different types of people and situations. Whatever type of borrowing you choose, make sure you will be able to afford the repayments. Prepare a budget of your monthly expenses to check what you can afford to pay. When choosing credit deals, it's important to make sure you are getting value for money. One way to compare deals is working out the interest and APR Use the information below to help assess the pros and cons of the following credit options. Current account overdraft Credit card Unsecured personal loan Store card Hire purchase (HP) Secured loan or further advance on your mortgage Interest free credit deals on goods Credit Unions Buying goods on credit through a mail-order catalogue Go to Top of Page Current account overdraft Advantages Disadvantages and pitfalls Summary Easy to arrange, and usually costs nothing during periods when you aren't actually using it. Some banks offer low interest rates. Flexible - as long as you stay within your overdraft limit. You can repay it as soon as you like without any penalties. Some banks offer a small interest-free overdraft facility on their current accounts. Some banks charge high interest rates, monthly overdraft fees, and even arrangement fees. Charges will be high if you exceed your limit. Overdrafts have a habit of becoming permanent, even when you intend to use one to tide you over for a short period. A flexible method of short-term borrowing to get you through temporary cash flow difficulties. Overdrafts which include a fee on top of interest can make them an expensive way to borrow. Go to Top of Page Credit card Advantages Disadvantages and pitfalls Summary Short-term borrowing costs nothing - as long as you pay the whole bill within the interest-free period. Low introductory rates can make credit cards a very cheap way to borrow over, say, six months. Flexible - repay your debt whenever you like. Can be used for large purchases, subject to your credit limit. Extra protection against faulty goods or non-delivery. Easy to rack-up large debts by spending more than you can really afford, especially if you have several cards. Credit card borrowing can take on an air of permanence, because there may be no set repayment schedule. Introductory low rate periods can be much shorter than you expect. You'll be charged if you exceed your credit limit or forget to pay your bill on time. Some cards charge an annual fee, but there are plenty that don't. Some lenders offer 'optional' payment protection insurance and try very hard to persuade you to take it. This type of insurance can be a good thing if you fall ill or lose your job, but might not be much use in your circumstances. You may already be covered by other insurance so don't be pressurised into taking it out unless you need it. Interest rates are often very high. Can be an expensive way to borrow. A handy form of free short-term credit if you pay your bill in full each month. If you are careful to control your spending they can be a cheap way to borrow Go to Top of Page Unsecured personal loan Advantages Disadvantages and pitfalls Summary You have a fixed repayment schedule - so your debt will be paid off within a set time, as long as you meet the payments. Set repayments are handy if you don't trust yourself to repay money you borrow with an overdraft or credit card. Some lenders offer competitive interest rates. May be more suited to borrowing larger sums, over a longer term, than overdrafts or credit cards. Check the terms carefully if there's a chance you may want to repay early. Many lenders charge you most of the interest that you would have paid if you had kept the loan for the full term. Inflexible - you have to pay it back each month, even when money is tight. Try to match the repayment period to what you want the money for. For example, don't take out a 10-year loan for a car if you expect to have the car only, say, five years. The cheapest rates may be restricted to the most creditworthy customers or those who are borrowing larger sums. Shop around to get the best rates. Some lenders offer 'optional' payment protection insurance and try very hard to persuade you to take it. This type of insurance can be a good thing if you fall ill or lose your job, but might not be much use in your circumstances. You may already be covered by other insurance so don't be pressurised into taking it out unless you need it. Personal loans can be a sensible way to borrow a substantial sum over a term of between, say, one and five years. But they can be expensive, and they are not so good when you need flexibility or a short-term credit facility. Watch out for lenders trying to persuade you to add to your loan half-way through. Go to Top of Page Store card Advantages Disadvantages and pitfalls Summary May entitle you to special offers at your favourite shop. They shouldn't cost you anything, as long as you pay your bill in full each month. Interest rates are usually high. Some lenders offer 'optional' payment protection insurance and try very hard to persuade you to take it. This type of insurance can be a good thing if you fall ill or lose your job, but might not be much use in your circumstances. You may already be covered by other insurance so don't be pressurised into taking it out unless you need it. Carrying around a purse or wallet-full of credit and store cards can be a temptation to spend more than you can really afford. It can be difficult to keep track of how much you've spent overall. Some 'budget account' cards require you to pay in every month. If you don't buy anything, you just build up a balance. Some store cards charge around twice the interest rate of a reasonably competitive credit card. It may be best not to use them unless you are sure you'll clear your bill in full every month. Go to Top of Page Hire purchase (HP) Advantages Disadvantages and pitfalls Summary Allows you to buy big-ticket items (a car, for example) on credit. You might find this useful if you can't borrow enough to fund your purchase through a bank loan or credit card. You might find it easier to get credit from an HP company than from, say, a high street bank or credit card company. You don't own the item you have purchased until you have paid back all the money you owe. The HP company can claim the goods back if you don't make your payments. If you have paid a third or more of the value of the goods, the HP company would have to get a court order to get them back. You may still owe money on goods that have been taken back. May well be a more expensive way to borrow than a good value loan or credit card. Shop around for the best hire purchase deals. Some deals have smaller payments and a big payment at the end. Make sure you will be able to cover the final payment. You can back out of the deal and return the goods at any time, but you then have to pay enough to bring your total payments up to half the price of the goods. If the instalments you've paid already amount to that, you only have to pay for any missed payments or damage to the goods. Look at other options first. If you can borrow the money at a similar or cheaper cost through a bank loan or credit card, steer clear of HP. Go to Top of Page Secured loan, or further advance on your mortgage Advantages Disadvantages and pitfalls Summary Can be a sensible way to borrow for certain expensive items, such as home improvements. Because the loan is secured against your home, the interest rate should be cheaper than an unsecured loan and you may be able to borrow more. Also, you can cut your monthly payments by stretching the loan over a longer term. The consequences of not being able to keep up your payments are much more serious than with an unsecured loan. If you don't keep up the repayments of a mortgage or any other loan secured on your home you could end up losing it. Putting all your debts together and spreading them out over a longer term usually means you pay more interest in the long run, and being in debt can seem permanent. Not all secured borrowing is cheap - some lenders charge high rates that are more in line with what you'd expect to pay for an unsecured loan. Work out how much you have to pay back overall. Beware of putting all your unsecured debts into a long term secured loan. Don't use the reduced payments as a green light to build up even more debts on your credit card, personal loan or overdraft. If you do want to use the equity in your home to borrow, a further advance from your mortgage lender will probably be cheaper than other secured loans. Go to Top of Page Interest-free credit deals on goods Advantages Disadvantages and pitfalls Summary Deals often described as 'interest free options' allow you to delay paying for an item, perhaps for several months, or even longer. A great source of free credit if you know that you'll be able to pay in full by the end of a set period. Be careful, they aren't really 'interest free' at all. They allow you the option of avoiding the interest charges by paying up early. But if you go beyond the period, interest will have been charged throughout. Some retailers offering interest-free credit rely on the likelihood that you won't be able to pay the full purchase price at the end of the interest-free period. Many people end up paying for an item in instalments, at an interest rate which is likely to be much higher than you could get from other types of borrowing. Great if you can pay in full at the end of the interest-free period. It is up to you to remember to pay on time. If you don't, you'll probably pay high interest charges. Don't buy items you don't need or poor value goods just because they come with interest-free credit! Go to Top of Page Credit Unions What are they? Credit unions are mutual financial organisations, which means they are owned and run by their members for their members. Membership is based on people having a ‘common bond’ such as living or working in a defined area, working for the same employer or belonging to the same trade union, housing association, church or other association. Each credit union has its own individual ‘common bond’. Provided one member of a family meets the common bond requirements and has joined the credit union, the other family members living at the same address can usually also join. What can they do for you? Credit unions aim to help you take control of your money by encouraging you to save what you can, and borrow only what you can afford to repay. Once you have a reliable record as a saver (which usually means saving for a few months), you can apply to borrow from the credit union. As your savings grow you can borrow more. Usually, members of credit unions borrow small amounts to pay for household goods, Christmas presents or car repairs. The larger credit unions can lend larger sums over longer terms, eg for holidays or cars, but they sometimes require you to put forward security against the debt. Advantages: A credit union can help you get your finances under control. Credit unions are run by their members working as volunteers.So if you would like to take part in running the credit union, you could help people to manage their money better. You may not be able to save every week or month or you may have a poor credit record. If so, a credit union may be more sympathetic to your needs than a large financial institution. Credit unions welcome irregular savers, and all savers usually get the same percentage dividend on their savings. Dividends on savings can be up to 8% a year, but may be much lower than this or even nothing at all, depending on profits. Credit unions are much cheaper to borrow from than loan sharks – the interest that credit unions can charge on loans is limited to 1% a month. So a loan of £100 costs no more than£1 each month in interest. When you borrow from a credit union you normally get free life assurance that will cover the value of the loan. So the loan will be repaid if you die before fully paying it back. Disadvantages: You cannot simply join whichever credit union you think is best. You have to meet the common bond requirements yourself, or be a close family relation to someone who does, and is already a member. You cannot join a credit union just to get cheaper loans, you usually have to save with them first. The rules on this vary between credit unions. You cannot save or borrow in the name of a business you may be running. The borrowing must be in your name regardless of it's purpose. Go to Top of Page Buying goods on credit through a mail-order catalogue Advantages Disadvantages and pitfalls Summary You can usually spread the cost of your purchases over a series of small weekly payments. You may find it easier to get credit from a catalogue company than from a traditional high-street lender. You can borrow smaller amounts of money than you can with most other types of credit. The goods will be delivered to you and are generally easy to return if they are not what you want. The price of the goods in the catalogue may be more expensive than you would pay with other retailers. The weekly payment may look small, but catalogues are rarely a cheap way to buy on credit. If there's an interest charge, look at the APR, and the total amount you'll end up paying. It's probably more expensive than the other borrowing options you may have. The choice of goods may be more limited than in high street shops. If there are other borrowing options available to you, check them out before buying goods on credit through a catalogue. You may be able to get the goods, and the credit, cheaper elsewhere. Go to Top of Page What is APR? APR stands for the Annual Percentage Rate of charge. You can use it to compare different credit and loan offers. All lenders have to tell you what their APR is before you sign an agreement. It will vary from lender to lender. Generally, the lower the APR the better the deal for you, so if you are thinking about borrowing, shop around. Don't forget that sometimes bank loans are cheaper than the credit schemes offered by stores. If you find a deal with a low APR, ask the following questions: do the charges included in the APR vary, or is the rate fixed?If the charges are variable, your repayments could go up or go down. If the rate is fixed, your repayments will stay the same. are there any charges that are not included in the APR? This could include something like optional payment protection insurance. If so, make sure you understand what they are and when you would have to pay them. what are the conditions of the loan or credit and do they suit you? For example, do you have achoice about how and where you make the repayments? If you suddenly have spare money, can you pay the loan off early - without penalties? Go to Top of Page What special protection do I get if I buy goods or services using a credit card? When you use a credit card to buy something both the 'lender' and the 'supplier' are responsible for your purchase.This means that if anything goes wrong with the supplier you can get your money back from the lender. For example, if the goods are not delivered or are faulty, you can claim your money back from either the lender or the supplier. This could be useful if, say, the supplier goes bust. You are entitled to this protection by law (under Section 75 of the Consumer Credit Act 1974), but there are exceptions. The credit card company is only liable for items of goods or services costing more than £100 and up to £30,000. It's also worth remembering that this protection only covers credit cards. It doesn't apply to other types of plastic card (such as charge cards and debit cards). Go to Top of Page

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