Secured loans, remember the good old days?

I do! And I’m so glad things have changed and moved forward, as there has never been a better time for a homeowner to borrow money by using their home as security. Whether it’s for debt consolidationhome improvements or to sort out your bad credit, there are now loans out there that do not rip off the consumer.

In the good old days you would pick up a newspaper TV magazine, see an advertisement that caught your eye, call a telephone number and, after a 10 minute interrogation by someone just out of school you would be sent a bundle of paperwork to complete. Once you had found a spare three hours to complete the forms, you would return them for a ‘decision in principle’.

If you were lucky enough to be accepted another recent school leaver would contact you with the loan details, and offer you a loan with rates starting from 22.6% APR. Their sales spiel would always include the phrase “your repayments include insurance to cover you against accident sickness and redundancy”. Very few customers were given the option of not taking this insurance (also known as Payment Protection Insurance or P.P.I.), with many brokers and lenders telling customers it was compulsory.

It didn’t matter if you didn’t qualify for the insurance due to your age, job or previous medical conditions, and the P.P.I. premiums were paid by a lump sum in advance to the insurer. Borrow £40,000 and that premium could be as much as £12,800; a loan of £100,000 could cost you an additional £32,000, for an insurance policy that would be worthless to you.

The charging of very high broker fees became common in the mid 1990s, with fees up to 20% of the amount borrowed being charged. So secured loan brokers would receive a fee, commission on the PPI policy that could amount 10% of the loan amount, commission from the lender of up to 20% and for the big brokers an additional override bonus for reaching volume targets  It’s no wonder so many brokers sold their businesses for tens, even hundreds of millions of pounds.

So you received your money, had been given an interest rate to make your eyes water, had paid a fortune for insurance you didn’t need and had been charged an additional fee, but the pain didn’t end there. If you found yourself in a position to repay your Loan before the loan term ended, a clause in the loan agreement allowed you to be charged a penalty under the ‘Rule of 78’. This meant that if you took a secured loan over a relatively long period, you could still owe more than you borrowed halfway through the term. It was this redemption method allowed lenders to pay the huge commissions and overrides to brokers.

So what has changed?

Well, firstly, single premium Payment Protection Insurance was banned in May 2009, with the PPI mis-selling scandal still rumbling on today. Some of the crooks that operated within the secured loan industry are now active in the PPI Claims Industry.

Secondly, redemption penalties for loans under £25,000 were reduced to just one month’s interest in March 2005 and loans over £25,000 followed suit in March 2008. Thankfully ‘Rule of 78’ redemptions are now history.

With the advances in technology, the paperwork we now issue to a customer is pre-completed with their personal information. At Imagine Loans all the customer has to do is sign the forms, so no more filling in lengthy Application Forms and Declarations.

You still have the same benefits as before, that under Consumer Credit Act laws you cannot be charged any up front fees whatsoever. All costs that are incurred in the processing of the loan must be paid by the broker arranging your loan, whether it’s successful or not. If you apply to a broker who asks for money to pay for a valuation or requests an up-front fee, cancel your application and report them to your local trading standards office. It is against the law – don’t let them get away with it!

What else has changed? With redemption penalties being reduced to just one month’s interest, lenders do not pay anywhere near the same level of commission as before and override bonuses have disappeared. This gives you, the customer, more opportunity to shop around for the best deal by comparing the Completion Fee added to your loan by different brokers. All loan Brokers have to charge a Completion Fee – it’s the only way they can recoup their costs and make a profit for arranging your loan. But remember! If the loan does not proceed they cannot charge you.

Why you should always shop around?

Secured loan brokers all use the same small handful of lenders, so the annual interest rate will almost always be the same. What will be different is the APR and monthly repayment, as it is the Completion Fee that determines the APR and payment you are quoted. An example of how much these can vary for what is exactly the same loan product is shown below: -

You wish to borrow £30,000 over ten years on a capital repayment basis for debt consolidation and home improvements. You apply to two Secured Loan brokers – one is a well known company in our industry and the other is Imagine Loans. The well known broker always charges £2,975 on completion but Imagine Loans only charges £1,495.

Company

Completion fee

A.P.R.

Monthly Repayment

Well Known Large Broker

£2,975

9.8%

£386.28

Imagine Loans

£1,495

8.6%

£368.94

Applying to that well known company that advertises all over the internet and the television would cost you an extra £17.34 per month. Keeping the loan over 10 years would mean an additional £2,080.80 in loan repayments. And remember, this is the same loan product from the same lender – it just has two different brokers arranging the loan.

Also remember that if you apply to a broker who subsequently passes your details onto another broker to arrange your loan, both companies will be looking to learn an income from your application. You could find the broker fees you are charged to be double what they could be if you approached a company like Imagine Loans.

To find out more, download our Second Charge Secured Loan Borrower Information Guide that tells you everything you need to know if you want to borrow money. Alternatively, call us today on 0800 710 1777 or click here to visit www.imagine-loans.co.uk.

Thanks for reading.

Tony Sutton

Tony Sutton has worked within the second charge secured loan industry since 1983 as both a lender and a broker. He is a regular contributor of his extensive industry knowledge to the financial press. You can see his profile here