Loans, other than mortgages on property, are featuring in the lives of most adults. That new car or the house extension needs financing somehow, but are conventional secured and unsecured loans the best and cheapest way of raising the money?
This article shows you how to save money on borrowing, at least for the larger sums, over £15,000, for example.
There are many lenders willing to provide loans to a wide range of people, with the high street banks offering the lowest rates for those with good credit histories and sub prime lenders charging significantly higher rates to those with a history of credit problems.
Interest on loans from high street banks start at around 7% if you shop around and secured loans, which use equity in property to provide security to the lender, can start at slightly lower rates, particularly if you have a good credit score and hold a mortgage with the bank concerned.
As secured loans are a “second charge” on a property, with mortgages being the “first charge”, a mortgage offers a lender more security than a secured loan as the “first charge” always takes precedence, should repossession be required. Lower risk means lower interest rate charges so mortgages are generally cheaper than secured loans.
If you want to borrow less than £10,000, say, then it is generally better to try and get an unsecured loan from a high street bank, if they will lend to you. It can be quick and easy with reasonable interest rates, as long as the bank likes your credit profile and you probably bank with them.
Bigger loan amounts and credit history problems present a different story, though.
In this case, you will need to offer the lender some security against their loan – equity in your house. This is where you can save considerable amounts of money.
By and large, it takes about the same time, and similar paperwork, to arrange a secured loan as it takes to arrange a mortgage. You can also borrow more with a mortgage as long as the value of your property allows this. As we’ve said, mortgages generally have lower interest rates than secured loans, because they are first charges, compared to the secured loans being second charges on the property.
You can currently get mortgages and re-mortgages from around 5% so you can save make considerable savings compared to the costs of a secured loan. You can also take the opportunity to re-finance your property using a mortgage with a lower rate at the same time.
If remortgaging, many lenders will offer free valuations, making this an attractive alternative, particularly when combined with a fixed rate or discounted rate mortgage deal.
A word of warning, though.
If you have early payment redemption charges with your current mortgage, then these need to be considered carefully when comparing the cost savings with a secured loan. This is where you need a skilled and professional financial advisor or broker to help you make the best decision.