Looking Beyond The Loan Promotions

People who watch the television advertisements for companies offering easy loan consolidation might think this is a sound financial choice. After all, if people like Carol Vorderman are fronting them, then they have got to be trustworthy. But even though there are celebrity endorsements, it is worth paying attention to the fine print in loan offers.

One type of loan that is often touted on television is the secured loan. This is a loan that caters for people who have a poor credit rating, with bad debt, arrears, defaults and County Court Judgements in their past. However, if they own a home, they can borrow large sums of money. It doesn't even matter whether they own the home outright or whether it is mortgaged.

How Secured Homeowner Loans Work

Secured homeowner loans work like this. Lenders value the property, taking into account the owners' equity and the amount of debt owed. This gives a figure they are prepared to lend. In most cases this is up to 85% of the equity. Homeowners can have secured loans of hundreds of thousands of pounds. If they meet the lenders' criteria, some people can have borrow up to 125% of the equity in their home.

Repayment periods for secured homeowner loans are longer than for unsecured loans. Unsecured loans have repayment period of up to 10 years, but people can only borrow up to £25,000. These loans are regulated by the Financial Services Authority (FSA). Secured loans can be for periods of up to 30 years, but these are unregulated.

Heeding The Warnings

At the end of the celebrity television endorsements of secured loans, there is always a warning. It says:

• that property values can go down as well as up
• that interest rates can go down as well as up
• that your home is at risk if repayments are not kept up.

These three points mean that borrowers need to be aware of what they are getting into. If property values fall at the same time as interest rates rise, borrowers could end up with a toxic loan. This is a loan that damages financial health rather than improving it. This is not what most people expect when taking out a consolidation loan. If borrowers struggle with repayments, they could end up losing their home. So it's always worth considering whether a celebrity endorsed loan is really the best option for long term financial health.

Other Toxic Loans

Other loans that may turn toxic are payday loans. These are intended to be short term small unsecured loans. Amounts are typically less than £1,000. There are no credit checks, so people with a poor credit history can use these loans to help with short-term financial difficulty. Payday loans are meant to be paid back within a pay period (two weeks to a month). Lenders charge a fee which is added to the sum borrowed. This equates to a high annual percentage rate (some estimate it at up to 300%).

The problem can arise if people are unable to repay the loan on the specified date. Most lenders will allow one or two rollovers for an additional fee each time. This could mean that repayments are almost double the original loan amount within a couple of months. However, if no money is paid back, lenders will call the collections agency. This could seriously damage borrowers' credit rating and financial health.