What is the difference between a personal loan, a secured personal loan and a mortgage?
People frequently get confused by the terminology used within the lending industry to describe different forms of loans. Loans can be either secured or unsecured and, if they are secured, they can be first or second charge loans.
Most people understand unsecured loans. They are simply fixed term, fixed amount loans and no form of security is required. Credit cards, revolving credit (frequently used by retailers), and overdrafts are popular alternatives to unsecured loans.
Secured loans, as their name implies, are secured by a charge on the applicant’s property. This means that if the applicant defaults on their loan payments, the lender has the right to repossess the property on which the loan is secured. In return for this security, secured loans usually come with competitive rates of interest and terms which will extend to 25 years. Unsecured loans typically cover amounts up to £15,000 for periods up to 10 years.
Loans can be secured on a property by either a first or second charge. If a person takes a mortgage to buy a property it will be secured with a first charge. If the homeowner subsequently applies for a secured loan with another lender (for example, to consolidate other debts, make home improvements, or to go on holiday) then the second loan will be secured with a second charge. This means that, in the event of default, the second charge lender is paid their outstanding monies after the first charge lender has been paid.
There are instances, however, where a homeowner may own a property outright and no longer has a mortgage, but applies for a secured loan to consolidate debts or raise cash for other purposes. This loan will be a first charge, as there is no mortgage on the property. This is the reason why, within the industry, the term is ‘secured loans’ rather than ‘second charges’ – as they are not always seconds.
Who are the major players in the secured personal loans market?
The brands you would expect to see featured in secured personal loan TV advertising, in the press and via direct mail include Ocean Finance, Norton Finance, Dial4aloan and Freedom Finance. These organisations are brokers – they do not lend their own money – but are all major players in this market.
Lenders include First Plus Financial, First National, Endeavour Personal Finance Limited, igroup and Future Mortgages.
What sort of things do borrowers use secured personal loans for?
Everything from debt consolidation to home improvements, car purchase, holidays and general capital raising. There is no restriction on the uses to which a secured personal loan can be put.
Are secured personal loans more expensive than other forms of loan finance?
No. As with any loan product, the rates vary depending on the applicant’s circumstances, but in general secured personal loans could start with rates as low as 6.9%. They are frequently cheaper than unsecured loans and will often accommodate an element of impaired credit, but the rates are not usually quite as low as mortgages.
Why do borrowers not simply apply for a mortgage? If I have a client who wants to raise additional capital, I would recommend a remortgage.
There are circumstances in which a remortgage is not always best advice. Consider, for example, a borrower who has their main mortgage with a traditional high street lender, with a competitive rate of interest. If, during the term of their mortgage they have experienced financial difficulties and built up a history of arrears, they may find it difficult remortgaging with another mainstream lender. Their only option could be a sub-prime mortgage with a higher overall rate of interest. In these circumstances they may be better holding on to their existing low rate, prime mortgage and applying for a secured personal loan to raise additional capital.
There are a number of examples of other circumstances where a secured personal loan may be a better deal than remortgaging. For instance, when a borrower has a mortgage with a competitive fixed or discounted interest rate and where there are redemption penalties to pay for early settlement, or if a borrower wants to apply for a loan over a short period of time.
With a remortgage they will incur up front fees (valuations, application fees, legal fees, lender’s references and possibly MIG insurance) and the loan will be repaid over the term of their mortgage – typically up to 25 years. This can make the total amount of interest payable quite high. With a secured personal loan, there are usually no up front fees charged and the loan can be taken for a shorter period than the main mortgage. This can make it a cost-effective way to raise short-term capital. It may also be the best option if a borrower wants to raise additional capital quickly. Secured personal loans can usually be completed more quickly than mortgages, because once a complete application has been submitted to a lender, the loan can potentially be paid out in 48 hours. With a mortgage it takes longer due to the offer of advance and completions process.
What about procuration fees – and the ability to sell other associated products such as MPPI, life cover and so forth?
Procuration fees on secured personal loans are very competitive. On a typical loan of £15,000 a broker will receive a procuration fee of £700. Secured personal loans should also be considered in conjunction with the associated insurances you would normally consider when recommending a mortgage such as MPPI, life cover, buildings and contents insurance and critical illness cover. Most secured lenders will offer a competitive range of insurance products, or you can recommend other products you may prefer.