Secured Loans
A secured loan is a loan that
whereby the borrower has to provide the lender with some form of security. That is, in
exchange for the loan the borrower will pledge some asset as which will be taken by the
lender should the borrower default on the loan. This may be a property, a car, jewellery
or anything of value that the lender is willing to take as collateral.
A mortgage is a typical secured
loan, usually used by a borrower to purchase a property. The security is in the property
and lender usually keeps hold of the title deeds until the loan is paid in full. Should
the borrower default on the repayments of the loan, the lender has the legal right to take
the property (repossess) and sell it to recover the outstanding loan.
When purchasing a car using a loan,
as with a property, the security is in the car itself and the lender has the right to
repossess the car should the borrower default on the payments. Car loans are usually
limited to just a few years, due to the steadily reducing value of the vehicle.
Secured loans are usually over a
fixed time period (term) and the lender may charge a penalty if the loan is paid off
before the agreed term. When entering into any loan agreement of this type, ensure that
you are aware of any charges of this nature when deciding on a particular lender.
Unsecured Loans
An unsecured loan is of the type where monies are provided
by the lender and are not secured against any of the borrowers assets. Loans of this type
are common. Typical unsecured loans: personal loans, bank overdrafts, credit cards,
etc. Unsecured loans are more difficult to obtain than secured loans and are
adversely affected by the personal standing of the borrower, i.e employment, health,
credit history, current financial commitments etc.
APR (Annual Percentage Rate)
As defined by the Financial Services Authority (FSA).
“APR stands for the Annual Percentage Rate of
charge. You can use it to compare different credit and loan offers. The APR takes into
account not just the interest on the loan but also other charges you have to pay, for
example, any arrangement fee. All lenders have to tell you what their APR is before you
sign an agreement. It will vary from lender to lender.”
The APR is useful to compare credit and loan offers. All lenders must tell you what the
annual percentage rate is before you sign an agreement. This of course will vary between
lenders. As a general rule the lower the APR then the better the deal you are getting.
However, the APR does not include some other costs that may
be associated with the loan. These can be arrangement fees (a charge for administration
for setting up the loan), Solicitors fees (if you are taking out a mortgage). Early
settlement fees (if you pay of the loan before time some lenders require compensation and
this may be a significant figure).
Some lenders will quote you a flat rate of interest which
will sound cheaper than the equivalent loan quoted as APR. A flat rate of 5% may have an
equivalent APR as much as 10%. Always compare loans if possible using an APR and if the
lender doesn’t quote you an APR willingly then beware.
Interest Free Deals
Interest free offers are ‘hooks’ that are employed
by sellers to pull in the unwary..
When the interest free period is over and you have to start
paying off the loan, you will find that by the time the loan is paid off, you will have
paid considerably more than if you had paid for it cash or even purchased the item using a
low cost loan.
Compare the cash price of the goods you want to buy with the quoted credit price (the
total amount you will have to pay over the loan period).
The credit price will always be higher than the cash price and the difference can be
considerable.
If you can’t pay cash then go for a low cost loan a keep away from interest free
deals.
Store Cards
If you have a store card – cut it up and never take one on
again.
Store cards are hideously expensive
credit and should be avoided at all costs. The interest rate is often more than 25%, far
greater than your average competitive credit card.
If you are in debt to a store card then
pay it off. If you can’t pay it off then use one of the balance transfer deals
offered by the credit card companies -see below.
Balance Transfers
Note: If your credit rating is not good then this type of deal may
not work for you.
Many credit card companies like to gain
your business by offering to pay off your other credit card/store card debts and in so
doing charge you a lower interest rate and therefore save you money. This can save you
from 10’s to 1000’s of pounds and should be taken seriously. Before doing
a deal always check the introductory interest rate, usually a six month period of 0% on
your new card and the interest rate you will eventually pay. If the rate you will
eventually pay is less than you current card rate, you have a winner.
Shop around the various balance transfer
deals and get the best rate you can.
If you are really on the ball you could
repeat the same thing six months later by changing to another credit card company offering
a transfer deal and get another six months of interest free credit. You can do this as
many times as you like, as long as there is a credit card company willing to do you a
deal.
One word of
warning......
NEVER use your balance transfer
card to buy anything.
This
can be disastrous and here’s why.
Mrs Jones has a debt with a store card of £500 and she is paying 25% APR.
She pays of the store card using a
balance transfer with a credit card company and gets six months interest free credit.
So far, so
good. However....
It’s Christmas and she uses the new
card to buy presents and spends £500 on the card. She has the full intention of paying
this off with her first pay cheque after Christmas.
After Christmas she gets her pay cheque
and pays off the £500.
So what’s the problem?
The credit card company will always take the lowest interest part of
a credit deal first when being repaid.
Before Xmas
Mrs Jones Credit Account
Debit £500 rate of interest 0% for six months.
After Xmas
Mrs Jones Credit Account
Debit £500 rate of interest 0% for six months.
Debit £500 rate of interest 18%.
When Mrs Jones paid back the £500, she
paid back the £500 at 0%
leaving her a £500 debit on her card charged at the card’s full interest rate.
Result
Mrs Jones Credit Account
Debit £500 rate of interest 18%.
Final Word
It is always easy
to buy things with credit.
Ask
yourself:-
- Neither a borrower nor a lender be;
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.
This above all: to thine own self be true,
And it must follow, as the night the day,
Thou canst not then be false to any man.
- William Shakespeare, "Hamlet",
Act 1 scene 3
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