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The Dos and Don’ts of Secured Loans

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.

An unsecured loan might have been a more desirable option as it would not entail putting the family home at risk. However I was told that in this uncertain economic climate, many lenders were insisting on a ‘charging order’ which effectively secures the property against the loan. This might not lead to automatic repossession if I defaulted on payments, but it still used the house as security and, should we have to sell, would automatically give them first claim.

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.

The interest rate was something I had to think seriously about. With an unsecured loan, interest rates can be fixed for the duration of the loan, as this is only a few years. However, with long term secured loans, the rates will fluctuate with the base rate and changes in lenders’ policies. Interest rates may be low at the moment but we all know how quickly these can change and in five or ten years I could be paying considerably more.

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 never know when our circumstances will change and we suddenly find ourselves in need of a loan. What we can do to make things easier for ourselves, however, is to take care of our credit rating. This is affected by such small and things as overlooking payments on our credit cards, opening and closing accounts, moving around and leaving small debts behind and other easily avoidable things. Keeping a good credit rating will make life easier in the future.

Borrowing money is a serious business and not an option I would have chosen had our circumstances been different. In such a worrying situation as we faced, we had no choice, but I would certainly recommend to anyone contemplating home owner loans that they do their research thoroughly first. Debt counselling is free and professional and there are several very good advice sites on the internet to help you make informed decisions about loans before you take the major step of putting your home up as security.

Article Source: http://www.ezinearticles.mk

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