When my son found himself in serious difficulties abroad last year, I needed to find £40,000 very quickly to help him out. My savings were not great, so I approached the bank to enquire about home owner loans, which are secured loans against your house and payable over a long term. I had very little time to consider alternative ways of raising such an amount of money, but I did get some advice from friends first.
I was interested in an unsecured loan at first. This seemed a better option because it would allow me to borrow money without having to put up my house as security. When I started to enquire about this type of loan, I was told that most lenders would insist on a 'charging order' against my property. Although this would not necessarily lead to repossession, it would give the right to claim against the sale of my house if I could not keep up the payments.
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Unsecured loans have much shorter repayment terms than secured loans - usually a maximum of seven years; whereas secured loans allow much longer. In fact because of the costs of setting up secured loans for lenders, they actually prefer these to be long-term - anything up to twenty years. Longer repayment times mean smaller monthly payments, but they also mean considerably more in total interest charged.
When you are borrowing a large sum of money over a long term, it is easy to be tempted into taking out more than you absolutely need. My wife thought that an extra £3000 for a decent family holiday would make very little difference in the long term, but thanks to the research I had been doing, I was able to set her straight on this. There would be time enough for holidays once we were completely debt-free and the less we borrowed, the sooner that would be.
There is another important difference between unsecured and secured loans. Because unsecured loans have a shorter repayment span, there is a fixed rate of interest on them for their duration. However the interest on secured loans is often variable and can go up or down according to the base rate and the terms of the lender, making them a variable rate debt. What might sound like an attractive rate today may not be so attractive in five or ten years' time.
My wife, being the eternal optimist, was convinced we would win the lottery or something and be able to write off our debt overnight. I had to point out that in such an unlikely event, we would probably have to pay even more! This is because secured loans usually include 'redemption penalties' to deter you from paying off your loan early. In fact we could end up being fined if we tried to do so!
One interesting fact I learned was the importance of a good credit score and how to achieve this. Having a good credit rating makes taking out unsecured or secured loans so much easier. Simple things like keeping up regular payments on credit cards and not leaving small debts behind when you leave an address can all help your credit score significantly.
When we first discussed taking out a loan, we had not given the subject the serious thought it deserves. Had we got into serious debt, we would have found out a great deal more on the subject from professional and free debt counselling, but our situation was slightly different. I did, however, find some excellent advice online about both unsecured and secured loans, which prevented me from making any serious mistakes.
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