How Secure is Your Loan?

Secured lending is a worry for just about everyone right now. A borrower wanting to take out a loan or roll all their existing debts together can all too easily sign up for a secured loan - meaning that their home is at risk if they fail to make payments - possibly without realising it.

Of course the process of taking out any loan is often fraught with stress or panic and tensions may run highest with those who have already been turned down elsewhere. At this stage, by the time someone offers a loan, it is often grabbed with both hands before the borrower realises the implications of the word "secured".

The news - good for some, bad for others - is that the secured loan market is rapidly shrinking, with just seven players left in the market, down from 18 last year before the credit crunch hit. The sector has been battered in recent months due to the downturn in the housing market and the tightening up of mortgage rates and loans. Firstplus, owned by Barclays, threw in the towel yesterday and announced it would not write any more new business following a fall in demand.

Other high profile players that have withdrawn in recent months include Southern Pacific Personal Loans and Picture, which hopes to re-enter the market in the future. GE Money has also scaled down its operation recently.

The best loan deals still available

Not so secure business
The crackdown on payment protection insurance, often sold alongside loans and a money-spinner for lenders, is also thought to have affected business. The risk factor for lenders as well as borrowers has increased too, as property prices fall, providers of secured loans who need to force a sale to recover their money would have to wait in line behind the mortgage company and could well find that the property's value has dropped and there is no money left after the mortgage had been repaid.

Firstplus will stop writing new business from August 9 and plans to lay off 300 Cardiff-based staff, although it says its 128,000 existing customers will not be affected.

It's bad enough that the firm sounds like a school exam or a pregnancy test but they will not easily be forgiven for their cringe-worthy television adverts featuring (or should that be exploiting?) the "reassuring" sounds of Carol Vorderman. Badly done Carol.

Harder to get a secured loan
In common with mortgage lenders, secured loan providers have been tightening their lending criteria in recent months.

Firstplus recently reduced the amount it would lend from a huge 125% of a home's value to 95%. It also tried to boost business with a new brand, the heavily-advertised Fair & Square, which aimed to make home loans more transparent and offered lower interest rates for an introductory period to attract borrowers.

"In the past year we have tried a whole range of activities to develop our business but the market demand simply isn't strong enough," said Firstplus managing director Neil Radley.

Barclays bank reportedly put Firstplus up for sale last year, in a bid to reduce its exposure to high-risk lending. The UK bank acquired the loans business in its £5.4 billion takeover of Woolwich in 2000. Despite the problems, it may yet see get a decent price if it sells Firstplus.

Compare the top loan deals

Secured loans - the facts
Providers of secured loans will want to know straight away that you are a homeowner before they take the application process any further. This is because their business depends on being able to get back the money you owe by forcing you to sell your greatest asset - your property - if you cannot maintain regular repayments on the loan. In other words, the "security" is for the lender - not for you.

Secured loans may come in different guises and in particular may be sold as part of a "debt management" scheme.

When you take out a secured loan you will be warned that your home is at risk if you cannot keep up the repayments. This is not to be taken lightly. With a secured loan in place, your mortgage becomes a "first charge" on the property which means your mortgage lender has first call on it if you fail to maintain mortgage payments. The secured loan provider has a "second charge" on your property.

This means that once the mortgage lender has taken what it is owed, the loan company will then recover the money owed to it - if there is any left. If there is still any money left over after this then it will be yours. But of course at this point you will be homeless.

Secured loans explained

Not just mortgages putting homes at risk
But even if your mortgage is up to date, failing to keep up payments on your secured loan allows the lender to force a sale on your home. Even without this depressing reality, you could find that a secured loan is more expensive than traditional loans and certainly carries a higher rate of interest than your mortgage.

You may be faced with valuation and arrangements fees when you take out the loan and even find that you have to pay an extra fee if you try to repay it early. Always read all the small print and ask questions if you are unsure of the details.

"Promises of quick decisions, easy monthly payments and help for people with bad credit ratings or mortgage arrears look very attractive," warned David Harker, chief executive of Citizens Advice.

"Celebrity endorsements could lull also people into a false sense of security. But these can detract from the vital small print that loans may be secured against your home and that you could lose it if you miss payments. Companies need to make this information much clearer."

Source: http://money.uk.msn.com/loans/loans-guide/