You could lose your home if you miss repayments

What's the difference?

• Secured loans are very insecure for you because they are attached to your house.
• Find out how to get the best unsecured loan.
• Find out how not to get ripped off with a secured loan. 

We don't like secured loans at Moneymagpie. On the whole we think they are dangerous products. We much prefer unsecured loans. With unsecured loans, even if you miss payments for a long time you won't lose your home. The point of secured loans is that the loan company is protected because if you default they can take your home, sell it and get the money back that way. This is the worst option for you and the best option for them. This is why interest rates can seem cheaper than those of many unsecured loans.

Before you go for any type of loan see if you can free up cash for yourself by going through our saving tips. If you only need a small amount for a short time you might be able to do it by selling things on eBay or doing some money-making activities.

Am I prime or sub-prime?

If you still need a loan, you should check first if you are a "prime" or "sub-prime" loan candidate.  As a general rule, the better your credit rating is, the more likely you are to be "prime". This means that more lenders will want to lend to you and you are more likely to be able to get an unsecured loan at a decent rate. You would also be able to get a secured loan at a lower rate but, again, don’t unless you really have to!

If your credit rating is poor, on the other hand, then you will be considered "sub-prime" and you will have fewer lenders offering you loans. Those that do will want to charge you more or will only lend you a secured loan. Generally, lenders offer more expensive interest rates to sub-prime customers because they have to insure themselves against the possibility of things like debt collection costs. Essentially, the more risky they think you are, the more they want to charge in order to cover themselves. That's why people with regular incomes and a clean credit record get offered the low interest rates.

Your credit rating could be poor for all sorts of reasons – maybe you have had trouble paying off existing debts, either now or in the past, or your income is erratic or perhaps you haven’t borrowed any money before. Incredibly, if you have been good and sensible in the past and haven’t even tried to borrow money, that can count against you in your credit record. The reason for this is that you are an unknown quantity when it comes to managing debt. Banks want people who have a proven track record of borrowing money and making the repayments on time. If you haven't borrowed money before then it is anyone's guess how good you will be at paying money back.

Make sure you have checked your credit rating first. The reason for this is that if you apply for a loan and are refused by one lender then other lenders will be unhappy about lending to you. You really need to know where you stand credit-wise before you try the usual lenders. If your credit rating is poor then you could be instantly turned down for one of the cheaper loans.

Go to Experian, Checkmyfile or Equifax and find out what you have on your credit record.

How to get an unsecured loan

Your main concern when taking out an unsecured loan should be to find the cheapest possible. This doesn't necessarily mean the cheapest APR (annual percentage rate) although that is a good starting point. If you think you might be able to pay the loan off fairly soon then it is best to go for a flexible deal that you can pay off early without a penalty. If you don't then you can just go for the cheapest headline rate. See our comparison tables for the best deals.

Other important things to know when taking out an unsecured loan are:

• Borrow for the least amount of time because the longer you take to pay off a debt the more expensive it will be. For example, if you borrow £5,000 at 5% interest (APR) and take five years to pay it off, you will end up paying back £5,661.37 altogether. If you take 10 years to pay it back, you will have to pay £6,363.93 altogether. It may seem just like numbers, but would you walk past the difference – £702.56 – if it were lying on the street? Smart people hold onto every penny.
   
• Don’t just concentrate on how much the debt will cost you each month. You need to know the TAR (Total Amount Repayable) – that’s how much the debt will cost you to pay off altogether. So, if you look at the example above, borrowing £5,000 for five years means you have to pay it back at £94.36 per month. If you borrow it over 10 years you will only pay £53.03 a month. Even though it looks cheaper each month, the total amount you will pay back is £700 more than the five-year deal.
   
• Don’t be pushed into taking out PPI (Payment Protection Insurance) with the loan, particularly if you’re not an employee. These policies are mostly far too expensive and pointless for nearly everyone as they have lots of sneaky small print that allows them to get out of paying you if you suddenly need it.
   
• Make sure you understand the rules whenever you borrow (if you're unsure of what terms mean, search for information on Moneymagpie). For example, with some 0% finance deals on offer in shops, if you are late with any payments or miss one month they insist on all the rest of the money to be paid now and they slap on all the interest you would have paid during the 0% period.
   

What to watch out for when going for a secured loan

Secured loans are only available to people who own their own home. That's how they work - the loan is "secured" against your property so that if you default, the lender can take your home.

Also, although there are a few honest companies that provide secured loans, the majority are ones that we really don't trust. It's an area where you have to be very careful. There is a lot of money to be made from loans (have you ever wondered how they afford those expensive TV ads that run through the day?) and it can attract the wrong people into the game.

Their sales tactics are very aggressive and, although they might seem like they are being nice to you, in fact they are often fleecing you and tying you into deals that are the worst possible scenario for you. They borrow the money at 6% from another lender and will then lend it to you at 20% – and if you fail to pay they can take your house!

These loans often run over a much longer time than other types of loans – sometimes as long as your mortgage. The longer it takes to pay off a loan the more expensive it will be because when you borrow money, really you rent it. The more months and years you rent that money, the more expensive it will be overall.

Not only that, but interest rates on these kinds of loans can vary, which means they could go up or down at any time after you have taken the loan out. Make sure you can comfortably afford to pay it each month even if the interest rate went up by 1 or 2 per cent.

Who should get a secured loan?

For some borrowers, a secured loan can make sense. If....

• You are clear about the dangers of not repaying the loan.

• You are in control of your finances and you are not overspending.

• You are not just taking out the loan to spend on a holiday, car or other inessentials (it's not worth endangering your home for these things).
• You really have to have the money and you cannot get an unsecured loan.

What we recommend

If you have come to this point in the article and you still need to take out a secured loan then we  recommend that you follow these steps:

1. Consider talking to your current mortgage provider if you haven't already. Increasing your mortgage is definitely the cheapest, and probably safest, type of  "secured loan" on the market.
2. Speak to your bank about getting a secured loan. As they know you they may be the most likely to offer you a loan at a decent rate.
3. If your bank won't lend to you then you need to get help from one of the free advice services. Try Citizens Advice Bureau, or the Consumer Credit Counselling Service or National Debtline. They will help you look at your financial situation and suggest ways of sorting it out without resorting to a secured loan.

If you really want a loan

There are companies that specialise in secured loans who would be very happy to talk to you. Do watch out, though. Most of the secured loans companies are pretty aggressive in their sales techniques. They will try their best to get you to stretch out your loan for as long as they can (so that they get more money overall) and they will certainly try to sell you PPI (Payment Protection Insurance) which you probably don't need... or at least you could probably get a much cheaper version elsewhere. So whoever you go to – watch out! If you would like to compare secured loans - just in terms of the interest rates they offer - have a look at this comparison service for ideas.

Finding the best secured loan is harder than finding the best deals in unsecured loans as there are more factors to consider. If you have CCJs against your name and you have less equity in your home then some of the secured loans companies will not want to deal with you. The ones that will talk are probably ones that will charge more.

Also, remember that these loans companies will add on around 5-10 per cent of the amount you want to borrow in extra fees. So not only will you be paying over a long period of time – and therefore paying extra interest – but you will be paying back a much bigger loan than you thought at the start.

Do I know everything about the loan that I should know?

It is estimated that almost six million consumers face repercussions because they failed to read the small print. Remember that by signing on the dotted line you are binding yourself to all the terms and conditions that the loan provider is offering. By choosing to overlook what is often the most deceptive aspect of a financial arrangement, you are setting yourself up for serious trouble. Look out for asterisks and those little numbers you see dotted around the contract as these usually signify a catch.

Don’t forget to check out the information on exit charges and switching fees and the circumstances that they are applied. Should you choose to repay your loan early a penalty charge may be incurred which is usually higher the earlier you pay off your loan. Have a look at how the interest rates are likely to vary and whether or not there are any hidden charges. 

Don’t be afraid to ask the lender questions. If there’s something you don’t understand then it’s a potential danger to your financial situation. Dig out your magnifying glass and scour the document for anything suspicious – once again, it’s well worth taking a considerable amount of time out to do this as you’re potentially saving yourself a lot of money.

It’s vital to make sure that you have enough equity in your home to be able to pay off the loan. Keeping in mind the fact that house prices have been rising since 1995 and sooner or later must fall, you must ask yourself the question: “If the circumstance arises where I can’t keep up my payments, would the equity locked up in my house (possibly a lot less than right now) be enough to cover the cost of the debt?”

Should the answer to the question be "no", you could find yourself with negative equity. Negative equity is where the amount you owe on your home is higher than the value of the property. This means that if you can’t make your monthly payments, your home will be repossessed and you will also still be in debt. For example, you owe £150,000 and you own your £125,000 (market value) home. You cannot pay the debt so your home is repossessed and sold for less than its market value at £100,000. The money from the sale of your house would only cover £100,000 of your debt therefore leaving you with another £50,000 to pay off and no major assets to sell.

Can I change my mind?

Under the Consumer Credit Act, 1995, you are entitled to reconsider your decision to purchase a financial product within a certain amount of time. This is called a cooling off period or a cancellation period and it’s to ensure you don’t fall victim to pressure sales techniques. The window of opportunity you have to escape can be as little as five working days so it’s important to decide what you really want as soon as possible.  

Your decision to withdraw from the agreement must be put in writing – a phone call will not suffice. It’s recommended that you keep a copy and send a copy via recorded delivery or through email, as this is easily traceable. It’s also advisable to follow up with a call to confirm your letter. An important point is that if you sign up in their office, your right to withdraw the contract disappears. Yet another good reason to take the documents home to give them a good read before you sign.

What do I do when I can no longer afford the repayments for my loan?

First of all – don’t panic! Despite popular misconception, you do have options.

• Budget.The first logical thing to do would be to take some time out to make a budget. Check out our article for tips on how to get started. Visit charity shops for your clothes, make sandwiches and go for a picnic instead of a meal or get creative and start making people their birthday presents – whatever you do to cut back, make sure you don’t spend more than you have.

• Ask for advice. A good place to start looking for advice is your local Citizens Advice Bureau. These offer free, independent, confidential advice to consumers on a range of issues and they can negotiate with your creditors for you. They will make you aware of all your options and your rights. Getting an appointment in their offices is difficult as it’s always so busy, so if you want to talk to someone face to face you’ll have to queue up early on one of the days your local centre is open. They do offer a telephone service however, and most bureaux offer home visits and some provide an email option.

• Speak to your creditors. Remember that whoever is providing your loan does not want to repossess your house. Recovery costs are something they’d prefer not to have to contend with so make sure you let them know if you have any problems at all that will affect your monthly payments. The sooner you inform them of you situation, the more likely they are to come to an arrangement with you. They may offer the option of paying smaller payments for a period of time, dependant on your circumstances.

• Do not ignore the problem. One of the worst things you can do is ignore the fact that your creditors are hassling you – it will not make the problem go away. Ignoring the situation will only make the complications worse, the interest will pile up and you will find yourself getting further and further into debt to a point which is even more unmanageable. If you find yourself shying away from the problem then take a look at the Consumer Credit Counselling Service website. Once again these offer a free confidential service to people in financial difficulty.

What could happen if I don’t pay?

An unsecured loan

Should you find yourself unable to pay, the creditors will file for a County Court Judgement (CCJ) which will make it very difficult, and expensive, for you to borrow again. You will still need to pay the debt off after getting a CCJ and if you still don't pay then the creditors can apply for an Attachment of Earnings Order. This means your creditors will be legally allowed to deduct a sum from your pay before you receive it. They can also apply for a Charging Order – this means the debts can be secured against your property. Then they can apply for a Warrant of Execution – meaning that County Court Bailiffs can visit you in your home and remove some of your things to sell.

A secured loan

If you don't pay back a secured loan for a few months then the company can apply to have your home repossessed. See our article on dealing with repossession to find out what that process involves and how you can stop it happening – even if the case goes to court.

What to avoid

Payment Protection Insurance (PPI)

Creditors are highly likely to give you the option of taking out Payment Protection Insurance to cover the costs of your repayments if you find yourself unable to pay. This is unnecessary. PPI covers the lender, not you. Circumstances in which they will pay can include unemployment, accident, sickness or death – but a lot of circumstances are ruled out as being a valid claim as a result of the small print and hidden clauses they bombard you with.  PPI is often of much higher price than what it is actually worth – and if you still feel that this service is essential to your needs then take it out with a standalone broker rather than your lender, as the latter will charge much more.

Companies specialising in secured loans

Beware of organisations that specifically only offer secured loans, especially those that encourage people with poor credit history to apply. These companies will charge the highest interest rates because of the potential risks posed by the borrower. They are simply out to make as much money from you as they possible can, rather than provide you with a valuable service.

Cash back offers

The cash back offer may sound appealing but you have to think to yourself, how are these people affording to give me all this money? It’s because they lure you in with the fancy offer so much so that you fail to notice the extortionate interest rates. Some companies may be worth taking a look at, but compare the overall amounts that you’d have to pay out before you make a decision.