Guide to Secured Loans
Welcome to our guide to secured loans. Whenever your are considering a second mortgage or secured loan the process can be confusing and complicated – even overwhelming. After all you are embarking on one of the biggest financial decisions you will ever make.
It’s important that you understand what to expect when applying for a secured
loan before you sign your name to the dotted line. Too often, consumers need money quickly and sign loan agreements without understanding how much they are paying in interest or fees.
Educating yourself about secured loans can help you avoid common pitfalls and reduce the likelihood of falling victim to predatory lending practices
Understanding secured loans:
Building a solid foundation of knowledge about the secured loan borrowing process is important. Here are five steps to help you begin your journey.
- Before you apply for a secured loan try to find out as much as possible about what’s available in the market place.
- Gather all your financial documents; check your credit history and fix any blemishes on your credit file before you apply for a loan.
- Determine how much you can truly afford to borrow, create an accurate budget.
- Keep accurate notes; make a file and keep all loan documents and correspondence in that file.
- Shop for a secured loan lender or finance broker and compare costs. Be suspicious if anyone tries to steer you to just one lender and if you have any concerns consult your local trading standards or the Office of Fair Trading to make sure you are working with a licensed professional.
Who is involved in arranging a secured loan
Just like when you bought your home for the first time, it’s important to know who the main players are and what roles in the transaction they play. Here are some initial introductions:
The Borrower: a person who has been approved to receive a loan and is then obligated to repay it, plus any additional fees according to the loan terms.
Finance Broker: any person who for compensation or gain, or in the expectation of compensation or gain: assists a person in obtaining or applying to obtain a secured loan
Surveyor or Valuer: A qualified individual who uses his or her experience and knowledge to determine the value of a home and prepare the survey report. Increasingly lenders are relying on “drive-by” valuations or other Automated systems.
Understanding your Credit file:
The concept of credit – the reputation for paying your bills on time – makes it possible for you to acquire goods or money with the understanding that you will repay later.
Your history for paying your bills on time is collected by a credit reference agency. These agencies gather, maintain, and sell information about consumers’ credit histories. They collect information about your payment habits from banks, credit cards, finance companies, or retailers.
Why is it important? Generally lenders look at several things when considering a secured loan application: your income, your employment, your credit history, and the value of your home. When studying your credit history, almost all lenders look at your credit score and your debt-to-income ratio. The information contained on your credit report remains for six years from the date it’s first reported, and then cycles off automatically
Whether you have credit problems or not, it’s a good idea to review your credit report for accuracy and completeness before you apply for a secured loan. If there is inaccurate information in your credit report, you’ve the right to dispute it and have it removed. If you’ve been denied credit because of information on your credit report, the lender is required to provide you with the credit reference agencies name, address, and telephone number — and you’re entitled to a copy of your report from that credit bureau for a small administrative fee.
How much does a Secured Loan cost?
Determining how much you can afford each month is an important first step in shopping for a secured loan.
How much will your monthly payments be? Take into consideration future changes in your household income. Are you anticipating a promotion at work that would increase your salary? Will you be adjusting from a double income family to a single income in the coming years? If the interest rate is variable – can you afford the larger payment if the rates increase?
Your debt-to-income ratio is the amount of debt payments per month divided by the amount of your income per month. This ratio helps lenders decide how large of a secured loan you can comfortably handle.
Before you start shopping for a secured loan, you’ve got to work out how much you can afford to pay each month. You can do this yourself before applying for a secured loan by calculating your costs and determining your financial worth. Loan calculators are available online and can be a tool to helping you determine how much you can afford.
Bad Credit Problems?
If you have a lower credit score, or bad credit rating don’t assume that your choices are limited to high-cost lenders.
If your credit report contains negative information that is accurate but stemming from unique circumstances such as illness or temporary loss of income, be sure to explain your situation to the lender or broker. Don’t assume that the only way to get a secured loan is to pay a high price.
Take the time to shop around and negotiate the best deal for you. The following conditions will play a factor in your lender’s decision to provide you with a secured loan:
Debts: Having too much debt may lower the chances for you to take out a secured
Making late payments or skipping payments will show as derogatory or negative items on your credit report.
Taking steps to improve your credit record is one of the most important things you can do.
Understanding Your Costs
Loan to Values (LTV’s), rates, and fees can turn a loan that looks good at first glance into something else once all the facts are known.
Knowing the amount of the monthly payment or the interest rate is not enough. Be sure to get information about potential secured loans from several lenders or finance brokers and find out all of the costs involved with a loan.
When comparing secured loans, make sure you’re reviewing the same information in each loan such as loan amount, loan term, type of loan, monthly payment, penalties and features and annual percentage rate (APR).
TIP: Ask about the secured loan’s annual percentage rate (APR). The APR takes into account not only the interest rate but also, setup charges, broker fees, and certain other credit charges that you may be required to pay, expressed as a yearly rate. This will specifically tell you the cost of what you’re borrowing and will allow you to compare the costs of one loan to another.
TIP: Note everything in writing. A daily journal of all conversations can be a powerful tool in resolving conflicts later. Remember to note the names of anyone you speak to.
TIP: Never take a verbal promise on any detail or feature of the loan that matters. You’ve a right to receive commitments in writing and a professional should never hesitate to provide this. If your lender is unwilling to put his promises in writing, you should not rely on those promises.
A secured loan often involves many fees, such as administrative fees, broker fees, and transaction fees, settlement, and third party costs. Every lender or broker must give you an estimate of its fees, when you apply for a secured loan. Many of these fees are negotiable.
Some fees are paid when you apply for a secured loan (such as application and appraisal fees), and others are paid at closing. In some cases, you can borrow the money needed to pay these fees, but doing so will increase your loan amount and total costs.
Disclaimer: This information is intended to provide you with general information about secured loans. It touches on the basic steps in the process and suggests guidelines for avoiding pitfalls, but it does not attempt to provide financial or legal advice. If you lack knowledge or experience in negotiating terms, arranging financing, or handling related details, you should contact a financial advisor before acting. It is designed to be an educational tool. It does not endorse or recommend any person, product, or institution.