Have You Got A Toxic Loan?
A secured loan can seem like a dream come true, especially for someone with a poor credit rating. Finally, there's a way to afford that new car, expensive holiday, wedding or other family treat. And with a secured loan, your credit history won't count against you. But could some lenders be so eager to get you signed up that they lend too much?
How Secured Loans Work
A secured loan is a loan offered to a homeowner secured on the value of the house. It is a good option for people who own a house but who have County Court Judgements (CCJs), arrears or defaults in their credit history. It doesn't even matter if the house is mortgaged, as long as the borrowers have some equity in it. Lenders will take a first charge on an unmortgaged home and a second charge on a mortgaged home. This means they will get paid if anything happens to the borrower. Secured loans have lower interest rates than unsecured loans because of this added security for the lender.
Lenders normally have the home valued and will lend up to 85% of the equity for periods of up to 30 years. This is much longer than the normal 10 year period common with unsecured loans. Some lenders may even lend 125% of the equity, which is fine in a booming market, but not if the property market is in a slump.
As with other loans, interest rates for secured loans can vary and this is another potential problem. If someone has borrowed more than the equity of the house and the interest rate continues to rise, the borrower could then be in a negative equity situation. In other words, the borrower could end up owing more than the value of the house. This borrower has ended up with a toxic loan.
Simply put, a toxic loan is a loan that damages the borrower's financial health. In this situation, a borrower who ends up negative equity could struggle to meet the loan repayments. That means that the borrower is at risk of losing his or her home.
Many people use the option of secured loans for debt consolidation, rolling all debts into one to make a lower monthly repayment, but this is not always a good idea. A loan secured on the value of the borrower's home always carries a risk. Property values go down as well as up, and so do interest rates. For those who can, it is best to look at other finance options before deciding on a secured loan.
One of the problems with secured loans is that loans above £25,000 are not regulated, so borrowers need to beware before signing on the dotted line. Read terms and conditions very carefully and check out loan companies with the Financial Services Authority. Above all, borrowers should make sure that they can really afford the repayments. A bit of advance planning could prevent them from ending up with a toxic loan.