Secured loans: Get the real deal

Secured loans are one of the key products of the lending sector. The basic understanding of this product is that:

It is to be bartered out in exchange of some kind of property/asset which is generally in the form of the borrower’s home.

The principal amount is quite big and can range up to £250,000. In fact, it is the only loan that can offer such a big amount.

It is precisely because of the loan amount that the precaution of collateral has to be exercised.

In case the loan seeker is unable to return the borrowed money, the lender can still regain his investment.

Now, the main criterion to apply for secured loans is that the applicant has to be a homeowner. But then again there has to be a differentiation regarding the status of the homeowner. For example, a loan seeker living in a council home (which he has bought) and an owner of a suburban penthouse will obviously fall into different brackets in terms of loan amount especially because the sanctioned amount is based on the equity available in the borrower’s home. Depending on the assets value in the UK real estate market, lenders place a loan tag on it.

Lenders generally divide the entire secured loans market into four main segments on the basis of their performance value. These include:

Prime segment
Sub-prime segment
Adverse segment
Heavy adverse segment

The prime and the sub-prime segments are the cream of the lot. This particular market will provide the lender with the best options of profit firstly, in terms of home value and secondly, in terms of repayment capacity.

In some cases, lenders will also offer more than 100 per cent value of the property. The borrower may get a sanctioned sum which is equivalent to 125 per cent of the value of the asset in case it is liquidated. In case of such action:

It will first put the borrower in possession of an incredibly big sum of money. And, the more he borrows, the more interest he will have to pay. Also, the repayment period is bound to stretch, so the lender is assured of long term gains.

In case of failure in payment, the lender still has the legal authority to take over the house which will generate huge profits in the real estate market. And, this is especially so in the UK where house prices are incredibly steep.

Now, we come to the adverse and heavy adverse segment. The applicants in this segment will have a tarnished credit file which is the basis on which your financial health is judged. The presence of a fixed asset makes the lender inclined to provide secured loans to the customer inspite of his poor credit record. The main factors that are responsible for damaging your credit file include:

• Arrears, missed payments and late payments in your profile
• Defaults in the repayment tenure of your loan
• CCJs (Court summons against your name)
• Cases of personal insolvency
• Frequent job changes and changes in the address
• A negative or less than 0.36 DTI (debt to income ratio)
• Too many mortgages or loans running at the same time
• Small disposable income
• Frequent cheque bounces

Most of the business for secured loans is generated by this segment. There is a logical reason for this. Generally, there are two sets of people who apply for this type of financial help. Either the borrower has to have an urgent requirement for a big sum of money. Or he must be suffering from a bad credit history because of which he has chosen to take the aid of secured credit as this is the only form of financial aid which he will get right now.

A bad credit file puts the applicant in danger of application rejection. Although, there are many financial providers out there who specialise in offering credit to adverse credit holders, the borrower is most probably going to get the most competitive quotes against bad credit secured loans. (However, there will be a variation in the APRs that are to be provided to bad credit holders and other applicants).