Guiding Borrowers through the Maze of Secured Loans
by: Andrew Baker
Before offering tips to borrowers planning to take secured loans, it will be necessary to first define the need for a guide to secured loans, i.e. why a customer needs to be guided through secured loans. There are two reasons. Firstly, lenders lend not out of generosity. The loan has to be paid back. If the secured loan is not paid back, the second reason starts operating. The secured loan stakes its claim on certain asset/assets of the borrower as collateral. The loan provider has every right to liquidate the asset pledged as collateral to recover his dues.
Since, the process of repossession of collateral is a painful process, it will be necessary if the secured loan is taken with sufficient knowledge beforehand. And how do you intend to draw this knowledge from? Past experiences with loans, experiences of friends or relatives, magazines and journals, and most important independent financial advisors (IFA), are all sources of advice utilised by borrowers in the UK.
Now, coming to the advice that constitutes an important part of secured loans. The first thing to decide will be the amount of secured loan. This is not as easy a decision as most of us will consider it to be. The amount must be fixed keeping in mind that it has to be repaid after a certain time period. The most appropriate measure of the amount of secured loan will be the needs. A parallel decision on the part of the borrower has to be made regarding the extent to which the secured loan will be used. The borrower may decide to employ secured loans for only a part of their needs. The rest will have to be met through the borrowers personal resources. If the secured loan amount is decided to be employed for any other purposes, only then should the borrower draw a larger amount. The idea here is to prevent a misuse of the secured loans. Amounts ranging from £3,000 to £50,000 are available for the borrowers. The amount sanctioned as secured loan depends on several factors. The amount of collateral tended, the form of collateral tended, the credit status that the borrower enjoys, and many more factors have their reflections on the amount of secured loan and the terms on which the loan is provided.
A secured loan is the easiest to avail of in the UK. The presence of collateral shows the commitment of the borrowers to the secured loans. Lenders as well as the borrowers know that the asset pledged as collateral will be repossessed in the event of non-payment. For the purposes of repossession, no litigation would be needed. Because of this convenience, most loan providers prefer to lend as secured loans. The terms on which the secured loan is lent will show the preference that they enjoy over the unsecured loans. The most glaring differences will be viewed in terms of the APR. APR is the comparative rate of interest being charged by loan providers. Because of a lesser degree of risk involved, secured loans carry a lower APR. Rates advertised by the lenders will be dissimilar with the interest rates actually offered to borrowers. Several other factors like the amount of collateral, credit history of borrower, etc. have an impact on the interest rate. The interest rate will be quoted accordingly. Borrowers can negotiate on the interest rate up to a certain level by increasing the points offered as fees to the loan provider.
Collateral comprises an equally important decision. The asset pledged as collateral commands a certain value. Losing them to the loan provider through repossession will be painful for the borrowers, whether it is house or any other asset. Home secures the largest amount of secured loan. Next, in importance is automobile. Borrowers presenting these assets as collateral are able to draw a larger amount. The equity in home will be compensated with an adequate amount of secured loan. Generally, 70-80% of the equity in home is sanctioned to the borrowers. Loan providers however are ready to offer up to 125% of the home equity, provided the borrower has a good credit history.
Borrowers also need to determine the mode of repayment in advance. There are a whole lot of methods to choose from. If the method chosen for repayment is through monthly instalments, then there need not be any further plan to off set the loan balance. However, where the borrower has agreed to pay only interest as monthly instalment, adequate preparations need to be made for the payment of the loan balance at the end of the term. A repayment vehicle in which payments are made monthly or at some regular interval will be a good idea to prepare for the future payment.
The advice rendered does not claim to shield the borrowers of any future repercussions. The knowledge of the future repercussions that their decisions can lead to, however force borrowers to take the necessary steps. These steps, in turn, shield the borrowers from the after-effects of a taxing secured loan deals.
About The Author:
Andrew baker has done his masters in finance from CPIT.He is engaged in providing free,professional,and independent advice to the residents of the UK.He works for the Secured loan web site loans fiesta for any type of loans in uk,secured loans,unsecured loans,debt consolidation loans please visit http://www.loansfiesta.co.uk.
March 2006
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