Secured and Home Owner Loans - the Ins and Outs

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 was interested in an unsecured loan at first. This seemed a better option because it would allow me to borrow money without having to put up my house as security. When I started to enquire about this type of loan, I was told that most lenders would insist on a ‘charging order’ against my property. Although this would not necessarily lead to repossession, it would give the right to claim against the sale of my house if I could not keep up the payments.

Unsecured loans sound attractive because they have a shorter repayment span - usually less than seven years, which means you can be debt-free more quickly, though your repayments will be high. Secured loans tend to have much longer repayment spans - as much as twenty years as they can be costly for the lenders to set up. This obviously makes the monthly repayments smaller, but over the years, you end up paying much more in interest.

When you are borrowing a large sum of money over a long term, it is easy to be tempted into taking out more than you absolutely need. My wife thought that an extra £3000 for a decent family holiday would make very little difference in the long term, but thanks to the research I had been doing, I was able to set her straight on this. There would be time enough for holidays once we were completely debt-free and the less we borrowed, the sooner that would be.

There is another important difference between unsecured and secured loans. Because unsecured loans have a shorter repayment span, there is a fixed rate of interest on them for their duration. However the interest on secured loans is often variable and can go up or down according to the base rate and the terms of the lender, making them a variable rate debt. What might sound like an attractive rate today may not be so attractive in five or ten years’ time.

My wife, being the eternal optimist, was convinced we would win the lottery or something and be able to write off our debt overnight. I had to point out that in such an unlikely event, we would probably have to pay even more! This is because secured loans usually include ‘redemption penalties’ to deter you from paying off your loan early. In fact we could end up being fined if we tried to do so!

We might have found getting an unsecured loan much easier if we had taken more care to improve our credit rating in the past. I was surprised by how many minor things you can do to help this. Missed (or late) credit card repayments was one such thing we could have avoided. Switching and closing bank accounts and credit cards was another. Your credit score is like housekeeping or car maintenance - if you keep it clean and tidy, it works better for you.

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.

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