Introduction
As the equity in people's properties increases the Secured Loan market is growing at a rapid rate in the UK. As more and more lenders, brokers, packagers and introducers enter the market the different offerings of each business has become highly complicated. This article looks at the different factors Secured Loan providers take into consideration when someone applies for a Secured Loan and also the amounts of money they will typically lend. The target readership, for this article, is people looking to take out a secured loan, people involved in the industry or simply those with an interest in such matters. For simplicity the article attempts to categorise potential borrowers into three separate levels of credit worthiness.
Definitions of Phrases used in this Article
LTV - this is the Loan To Value rate offered. If you take out a loan for £20,000 on a property worth £100,000 then the LTV is 20%. Bear in mind if you already have a mortgage prior to taking out a secured loan then the LTV may be calculated on the 'free equity' in your home (Value of house less existing Mortgage).
APR - this is the Annual Percentage Rate and includes all other charges (commission etc.) not included in the 'raw' percentage rate for the loan. It was introduced by the OFT in an attempt to help borrowers compare like-for-like when looking at loan providers.
Affordability - this is the percentage of disposable income (wages less outgoings) that are needed to pay back the secured loan per month.
Secured Loan Prime Lenders
People in this bracket are considered a less risky proposition and this is probably why there are so many operators in this area. The APR rate offered by Prime Lenders is typically lower than other providers, but this is only because the borrowers don't tend to default as much on their secured loan so they don't have to build in a bad debt element to the charge. All factors are brought into consideration for each individual loan, but they offer loans up to 125% LTV. They will also offer loans ranging from £5,000 up to £100,000 and APR rates, at the time of writing, range from 6.7% up to 14.9%. They will also offer loans to the self-employed but, when they do, the percentage LTV may decrease and the APR rate charged may increase. Most lenders will consider ex-council house properties, but when they do, they may decrease the upper limit of what they will lend and may again decrease the LTV. Other loan providers completely ignore the fact the house was a council property whereas others will ask for proof of existing mortgage payments.
In a growing trend Prime Lenders are now more likely to ignore County Court Judgements (CCJs), whereas others will ignore them if less than a certain amount or if they are over a year or so old. Prime Lenders will typically set the affordability percentage at around 40-50%.
Some Prime Lenders offer a refund of some or all the Payment Protection Insurance (PPI) paid against a loan. Though it is worth noting there must have been no claims against the insurance over the term of the loan. Most Prime Lenders will only offer a secured loan to owner-occupiers and will not offer a secured loan on a property you own but don't live in.
Players in the Secured Loan market who deal with this niche include Nemo, Paragon, Picture, EBF.
Low Medium to Heavy Adverse Lenders
Lenders in this market will typically loan up to £150,000 and will ignore CCJs and payment defaults. They will lend on tenanted properties and lend to people who've done an Individual Voluntary Arrangement (IVA). In some cases they will also lend to discharged-bankrupts. In some cases they will also offer interest only payments, but this will be allowed against a set portion of the total loan amount.
The problem with them allowing for all these things is that the APR rate will be much higher and the LTV will also be less - typically up to 90%.
As borrowers in this bracket are considered higher risk than prime borrowers there are less players in this field.
Players in this niche are Future, SPPL and Money Partners.
Heavy Adverse Secured Loan Lenders
Players in this market will deal with tenanted properties, some state they will deal with unusual or difficult property types and some will ignore council discount. Some will also deal with existing bankrupts but the funds from the loan must be used to clear the bankruptcy order. A few of the lenders will trade with self-certification from the self-employed and will offer interest only loans. One of the players Blemain will also offer bridging loans.
As with the second niche all these things come at a cost, so the APR rate they charge will be considerably larger and the percentage LTV they will do will be fairly lower coming in at around 75-80%.
Within this niche we have Prestige, Swift and Blemain.
Conclusion
There are masses of factors and variables used in the calculation of loan APRs and whether a secured loan lender will take your business. It is probably far better to go to someone who will try and accurately match the borrower against the specific lender. You must bear in mind that whether you go directly to a lender or through a broker or introducer the rate you pay will in nearly all cases be the same.
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Adrian has a background in I.T management, but after noticing a niche in the market, formed the finance consultancy business Sprint Soft Ltd. Earlier this year he launched the secured loans specialist We Introduce You. Adrian blogs about his day-to-day life, secured loans and personal finance at The Introducer
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