Easy money - but at a price

Stephen Pritchard suggests ways of taking out cheap loans without putting your house at risk
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The Independent Online

Home owners have always had many choices for borrowing, above and beyond their mortgage: unsecured borrowing, such as a credit card or personal loan, a further advance from the mortgage company, and a secured loan from a separate lender.

The last of these options look attractive when set against unsecured loans and credit cards, because the interest rates can be cheaper. But they are cheaper for a reason: fail to keep up with payments and the lender can repossess your house.

Such loans made the news recently, as a result of a campaign by the website Moneysavingexpert and debt advice charities to persuade Carol Vorderman to stop fronting adverts for the lender FirstPlus.

The number of Britons taking up such loans has grown five times in just five years. Some lenders even market secured loans - so-called "consolidation loans" - to people who have already run into debt problems.

The typical interest rate of between 10 and 14 per cent for a secured loan looks attractive. But the borrower using a secured loan will be paying interest for far longer, often for 25 years.

If home owners do need access to additional funds and want or need to spread the payments over a longer period of time, financial experts say that either remortgaging or a further advance from their bank or building society will almost always be a better option than a secured loan.

David Hollingworth, director at brokers London & Country, says remortgaging and borrowing slightly more is usually a relatively straightforward process.

The new lender will want to know that the borrower's income can support the larger mortgage. Also, borrowing more than 90 per cent of the property's value will cost more, and remortgaging fees will need to be taken into account. But a borrower with a good credit record will have the pick of competitive, new business mortgage rates.

For smaller sums, a further advance can be more cost-effective, as it avoids the remortgaging fees. Although these advances can be more expensive than standard mortgages, because they are based on the standard variable rate, there are rarely penalties for early repayment.

Problems can arise, however, if a home owner no longer meets their mortgage company's criteria for borrowing, perhaps because of a drop in income or past credit problems. A lender will apply their standard loan-to-value and income criteria for additional borrowing.

Taking a secured loan might also be an option for someone with a mainstream mortgage whose financial position had deteriorated, so that if they tried to remortgage the only option would be to switch to a more expensive home loan from a sub-prime lender, thus paying a higher interest rate on the whole of their debt.

"The problem is that some people use secured loans as their first resort, when really they should be the end of the decision-making process," cautions Hollingworth.

And, although people with debt problems may have fewer alternatives, financial experts caution that secured loans should never be used for discretionary spending such as a holiday, car or home improvements. In the case of home improvements in particular, the first port of call should always be the mortgage company: lenders will usually look favourably on work that will add value to the property.

Even when it comes to consolidating debts, secured loans should be approached with caution. The lack of flexibility, combined with high interest rates, will often just make debt problems worse. "Any borrowing with high interest rates will not help those in debt," says Anna Bowes, financial adviser with AWG Chase de Vere. "If you are in financial trouble you need to sort your credit problems out and take advice from a debt advice service. You will need to tighten your belt."

Consumer Credit Counselling Service 0800 138 1111; Debtline 0808 808 4000

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