What is so bad about a secured loan?

paddeo

We need to borrow approximately £40k for a house extension. Our choices are add more to current mortgage or a secured loan.

The site says that secured loansd are "evil" why?

Clydesdale (our current lender) will offer us 5.79% fixed over 5 years
CapitalOne Homeowner Secured Loan 5.9% APR

TIA

Pat Long

lilac_lady

It's evil because you will lose your home if you default on the payments.

PoorDave

Surely in this case it's the same either way. If the required money is taken as a mortgage extension that's not so different to a secured loan.

Secured loans are bad when you're not spending the money on your house itself. I presume you've checked to ensure that the cost of the work is less than the amount it will add to the value of your house...

silvercar

secured loans are worse than unsecured loans because they put your home at risk and they generally last for longer and so cost you more.
secured loans are worse than extending your mortgage because the rates are generally higher.

Coupon-mad

A mortgage IS a secured loan, it is exactly the same thing. Adding a sum to your mortgage is still sometimes registered by your lender as a second secured loan at the Land Registry anyway (especially if borrowing for anything other than Home Improvements).

All you need to do is compare APRs, penalty charges and the t&cs of the loan you are considering. Also ask them what would the amount repayable be if you repaid the loan early, say after 5 years of a 10 year term. That question will often show you who the rip-off merchants are because some of the penalty charges for early repayment are extortionate!

This is only my opinion, I used to be a mortgage manager for a large Bank, specialising in secured loans for existing borrowers.

mrcow

The whole secured loan being evil argument is reserved for when someone builds up thousands of pounds of unsecured debt on their credit cards etc and then secures it all on their house with eg. First Plus and end up paying three times the initial amount at 10% apr secured over the next 15 years with PPI that they don't need (to "reduce their monthly payments" :mad:).

In the meantime they keep the credit cards and build up the unsecured debt again to be in an even worse position in a few years time.

Alternatively, someone thinks "I'm broke", sees a glossy advert on the telly and thinks, "Yes, I do need an expensive holiday. I will call Picture Loans and borrow loads of money that I can't afford and secure it against my house and then spend it on a car that will depreciate by 50% over the next three years and a big holiday that I can't afford."

Who needs to budget for stuff when you have Ocean Finance tripping over themselves to rip you off royally.

Don't knock it.......people actually do do this!

None of this really applies in your case as it's for an extension.

Just also make sure that you have enough equity so if there is a downturn in house prices, you won't be stuck in a negative equity situation if you need to sell for any reason.

At those rates, your extension is going to cost you about £770 per month and just over £46 in total. If it's affordable for you and you are going in having read the t&cs with your eyes open and are happy, then go for it.

Check out early repayment clauses & fees etc. and what will happen if you want/need to move house as with any secured loan.

roswell

I think the biggest risk with a secured loan is you stand the chance of putting yourself in neggative equity, The main reason these are "Evil" is not everyone put the money back into there house as pointed out above, A big chunck of cash in the bank can easy turn into 2 new cars a few holidays and paying off all or some debts but doesnt stop the over spending habbit.

kenshaz

Carol Vorderman does adverts on the television ,and has received a lot of comment on this site ,it is the high interest of these lenders on secured loans they are considerably higher than you would expect to pay on a competitive high street mortgage rate.

MarkyMarkD

The rates evidently are not all as bad as you suggest, as the example from the OP shows.

If everything else is equal, then there's no benefit taking the further loan from your existing lender unless the rate is lower. And their 5.79% fixed will probably have an APR higher than Capital One's 5.9%.

But, everything else is not equal.

As others have posted, most secured loans have worse early settlement charges - assuming Capital One's loan is over more than 5 years, I would expect that their loan would still have penalties in 5 years' time (their site says "there will probably be charges if you settle early") whereas your existing lender's 5 year fixed would not.

Furthermore, by taking a further advance from your existing lender, you could easily remortgage the whole lot (original mortgage plus further loan) in 5 years' time; if you have taken out a second charge loan from Capital One, you would have to redeem this (in most circumstances) to remortgage which would incur Capital One's early settlement charges. For this reason, it makes more sense to take further loan from your existing lender with penalties which match the term of your existing main mortgage - so, if you only have 2 years left on your current fixed rate (say), it's better to take a 2 year rate on the further loan so they mature at around the same time.

kenshaz

MarkyMarkD has given a conclusive answer.

paddeo

MarkyMarkD wrote:

so, if you only have 2 years left on your current fixed rate (say), it's better to take a 2 year rate on the further loan so they mature at around the same time.

That is one of the problems, we have 4 years left of current deal, and Clydesdale are only offering 2 or 5 years on the new amount meaning that one will expire before the other.