Wikipedia

Secured

A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral for the loan.

A mortgage loan is a very common type of debt instrument, used by many individuals to purchase housing. In this arrangement, the money is used to purchase the property. The financial institution, however, is given security — a lien on the title to the house — until the mortgage is paid off in full. If the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it, to recover sums owing to it.

In some instances, a loan taken out to purchase a new or used car may be secured by the car, in much the same way as a mortgage is secured by housing. The duration of the loan period is considerably shorter — often corresponding to the useful life of the car. There are two types of auto loans, direct and indirect. A direct auto loan is where a bank gives the loan directly to a consumer. An indirect auto loan is where a car dealership acts as an intermediary between the bank or financial institution and the consumer.

A type of loan especially used in limited partnership agreements is the recourse note.

A stock hedge loan is a special type of securities lending whereby the stock of a borrower is hedged by the lender against loss, using options or other hedging strategies to reduce lender risk.[citation needed]
Unsecured

Unsecured loans are monetary loans that are not secured against the borrowers assets. These may be available from financial institutions under many different guises or marketing packages:

credit card debt
personal loans
bank overdrafts
credit facilities or lines of credit
corporate bonds

The interest rates applicable to these different forms may vary depending on the lender, the borrower. These may or may not be regulated by law. In the United Kingdom, when applied to individuals, these may come under the Consumer Credit Act 1974.

Wikipedia

A loan is a type of debt. All material things can be lent; this article, however, focuses exclusively on monetary loans. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower.

The borrower initially receives an amount of money from the lender, which they pay back, usually but not always in regular installments, to the lender. This service is generally provided at a cost, referred to as interest on the debt. A borrower may be subject to certain restrictions known as loan covenants under the terms of the loan.

Acting as a provider of loans is one of the principal tasks for financial institutions. For other institutions, issuing of debt contracts such as bonds is a typical source of funding. Bank loans and credit are one way to increase the money supply.

Legally, a loan is a contractual promise of a debtor to repay a sum of money in exchange for the promise of a creditor to give another sum of money.

ft.com
When the Bank of England last week revealed a sharp and unexpected jump in unsecured loans, economists sat up and took notice.

The jump in February to £2.5bn ($4.9bn) – the highest level for unsecured loans in five years – at a time of falling mortgage lending, falling home equity withdrawal and weak credit-card lending, suggested that a safety valve of some sort might just have been blown.

Downbeat data add pressure for rate cut - Apr-06MPC minutes lift hope of April rate cut - Mar-20Central banks weigh on pound and dollar - Mar-19Interactive graphic: MPC decisions charted - Mar-19Full minutes from the last MPC meeting - Mar-19MPC leaves UK rates on hold at 5.25% - Mar-06Of course, the data for one month could easily be subject to reversal in a few weeks’ time. Nevertheless, some economists believed the figures were significant enough to warrant further study as they, in some ways, confirmed anecdotal evidence that the clampdown on credit was becoming painful for consumers.

Capital Economics posed the question this way: “Without wishing to sound too dramatic, is it a sign of strength and optimism, or an indication of pain and desperation?”

In other words, do the lending data suggest some version of the game “whack-a-mole”, where beating down demand in one place makes it pop up in another?

Paul Dales of Capital said that the “eye-catching” surge in borrowing was related to the near-total withdrawal of mortgage loans of more than 100 per cent of the property value, known as a 100 per cent loan to value (LTV) ratio. Those homeowners coming to the end of fixed rates on such mortgages have been unable to find a lender willing to extend a new loan. To avoid the sharp rise that comes with switching to a lender’s standard variable rate – two percentage points and more above fixed rates – many are seeking unsecured borrowing to top them up to the point where they qualify for a loan with a 90 per cent LTV. “People with a 100 per cent LTV mortgage now have no choice,” Mr Dales said.

With new mortgage approvals in February at 73,000 – close to a 12-and-a-half year low – it is clear that lenders have become more conservative.

Establishing the reasons behind the sudden jump in borrowing is important as the rise could be a signal that, despite a slowing economy, consumers are rushing to spend.

Tim Moss, head of lending at Mymoneysupermarket.com, a website that helps consumers find financial deals, said post-Christmas credit-card billings were unusually late in January this year which might account for strong loan demand in February. That is good news for the economy but leans against future interest rate cuts.

Mr Moss said unsecured lending might be the only option for some borrowers. “There is still demand to explore the possibility of unsecured lending,” he said, although the fear of being rejected – a reaction that can hurt a ­borrower’s credit score – is deterring some.

Moreover, interest rates on unsecured loans have not responded to the quarter-point cut in Bank rates since last year. “Some of our best deals now wouldn’t have made it into the top 10 last year,” Mr Mosa said. Among the 10 best deals available for a £5,000 loan, the average rate is 7.7 per cent against 6.5 per cent last year.

Factsheet: APR, AER and EARguardian.co.uk,

When it comes to loans and mortgages, some lenders charge hefty upfront fees, and low interest rates, while others charge low fees and high interest rates.

This is where measures such as the annual equivalent rates (AER) and annual percentage rate (APR) come in handy. These are calculated in the same way across providers. If you are trying to compare accounts, look for these, rather than the headline rate.
Annual percentage rate (APR)

An APR is used as a measure of how much it costs to borrow money and is quoted by mortgage lenders and companies offering personal loans and credit cards. The APR includes any upfront fees charged by the lender, spread over the period for which you are borrowing the money.

The APR tells you how much your borrowing will cost over the course of a year, as a proportion of the amount you have borrowed. So if you are borrowing £100 at an APR of 9%, you will pay £9 in interest and charges over the first year.

 Mortgage lenders will advertise a headline rate and an APR. Photograph: Linda Nylind In a loan advert, the provider will often quote a “typical APR” - this is because many lenders set the actual interest rate charged according to the borrower’s credit record and personal circumstances. A bank has to have offered its typical APR (or a better rate) to at least 66% of potential customers.

In a mortgage advert, the lender will usually quote a headline rate as well as the APR. Most lenders charge administration fees on mortgages, so APRs tend to be much higher than the headline rates.
Equivalent annual rate (EAR)

Like the APR, an EAR is quoted when you are borrowing money - this time in the form of an overdraft. Unlike an APR, this doesn’t include any fees for going overdrawn. Instead, it gives you an idea of how much your borrowing will cost if you were to remain overdrawn for a whole year.

The calculations take into account the rate of interest being charged, how often it is charged, and the effect of compounding it - charging interest on interest - over the year.
Annual equivalent rate (AER)

An AER is quoted on savings accounts and current accounts for when your balance is in credit. It is like the EAR but refers to interest earned, rather than paid. The AER shows how much interest you will earn over the course of a year and takes into account how often the interest is paid and what effect compounding will have.

This measure allows you to compare how much you will earn on an account where interest is paid monthly with one where interest is paid annually.

 AERs allow you to compare accounts and work out where your savings will earn most. Photograph: Getty The gross rate paid on an account offering monthly interest may be lower than the gross rate on an account offering only one interest payment a year, but when interest is compounded it may offer higher returns than the latter account.

For example, an account offering a rate of 6.25% paid annually may look more attractive than an account paying 6.12% with monthly interest payments, however the AER on the monthly account is 6.29%, as opposed to an AER of 6.25% on the account with annual interest payments.

If there is a charge for withdrawing your money, the AER will take this into account - so, for example, if you are charged 30 days’ interest for a withdrawal, this will be reflected in the AER.

If an account includes an introductory bonus for a few months, you should be told whether or not this is in included in the AER. If it is not, looking at the AER will enable you to compare it fairly with an account that offers a level rate of interest all year.

Independent.co.uk

Slash? Spend? Guarantee? Co-ordinate? We analyse the options for Gordon Brown as he heads for US talks on the credit crunch

1. Call urgent summit of banks

FOR: So easy it’s already been done – twice. Yesterday’s meeting between the big banks and the Prime Minister followed a similar gathering three weeks ago, when the financiers met for talks with the Governor of the Bank of England, also supposedly routine. No one was fooled then, either, it must be said. As well as the money markets, one of the things that seems to have frozen up during the credit crisis is the relationship between the City, financial regulators and the Government. Maybe the summit aided some mutual understanding.
AGAINST: We’re waiting for the “wide range” of initiatives promised by Mr Brown, but sceptics wonder if any amount of chatting in Downing Street drawing rooms or the Governor’s parlour will restore the credit markets to order.

VERDICT: Gives the impression of activity and could help if it does indeed prompt action. Sir James Crosby, former chief executive of HBOS, has been asked for some more ideas.

2. Cut interest rates again… and again

FOR: The Fed has been notably more aggressive than the Bank of England in this regard, lopping rates six times since last September. The key federal funds rate now stands at 2.25 per cent. The Bank of England could do more.

AGAINST: It hasn’t been working, so far. The trouble is that the structure of the mortgage market, with so many people on fixed rate deals, and the continuing high level of market interest rates have seen relatively little of the Bank or the Fed’s rate cuts feed through to home buyers and businesses. Rate cuts might also be storing up inflation. There’s also the problem that, as you cut rates you have less and less ammo “in the locker” as they approach the natural floor of zero – what Keynes called “pushing on a string”.

VERDICT: Keep cutting, or just print the money and drop it out of helicopters (Ben Bernanke, chairman of the Fed, has written about this possible act of economic desperation, albeit in academic terms).

3. Slash stamp duty for first-time buyers

FOR: Would help those clearly most in need of a hand, give the estate agents something positive to chat about during the viewings and might just boost the housing market, which is danger of going into meltdown. The boom in property values has left stamp duty verging on the punitive (though lucrative for the Treasury). It is a very crude tax.

AGAINST: A cut in stamp duty is usually thought of as helping sellers rather than buyers, which may not be the desired aim. It did not have a huge impact when Norman Lamont, then Chancellor, tried a similar ploy in the recession of the early 1990s. Such a change is also unlikely to revolutionise the credit markets.

VERDICT: Worth a try, but more about politics than economics.

4. Force the Bank of England to lend more to banks

FOR: It’s the obvious thing to do, and is already in effect happening. Yesterday’s £15bn “injection of liquidity” by the Bank brings its total intervention since the credit crunch began to £50bn. There will need to be more of the same. This may be the only way to avoid the outcome predicted by the head of the Council of Mortgage Lender recently, of mortgage advances this year running at only half of the level seen in 2007. That would spell doom for the housing market and the wider economy. The banks need to “securitise”, ie, sell on their bundles of mortgages to raise money to lend to house buyers. Without that conduit they cannot lend.

AGAINST: “Not the first thing we should do,” says Mr Brown, and you can see why. It would mean allowing the banks to swap government bonds for dodgy mortgage-backed securities, with no easily determined worth if the property market nosedives. Then again, it will surely nosedive anyhow if the Bank of England does nothing. A potential cost to taxpayers.

VERDICT: The Bank of England will have to lend sooner or later, so they might as well get on with it and smile.

5. Co-ordinate a global fightback

FOR: The credit crunch is an international phenomenon of vast proportions. This so-called “trillion-dollar meltdown” (that’s $1,000,000,000,000) has affected every financial centre and institution. So it is a probably good idea for the world’s central banks and governments to act together. For example, when the US Federal Reserve, the European Central Bank, the bank of Japan and the Bank of England all intervened simultaneously recently, it made much more impact than when they acted alone.

AGAINST: Much of the international activity – through bodies such as the IMF, the Financial Stability Forum and the Senior Supervisors Group – tends to be backward-looking.

VERDICT: When it happens, it makes headlines and boosts confidence.

6. Guarantee or buy surplus mortgage-backed bonds

FOR: Seriously considered in some Fed circles. It would get things moving, because the banks could easily find a market for their mortgage-backed securities and get on with lending cash and lubricating the economy. Bold, decisive and virtually guaranteed success. The Government floated “kite-marking” securities issued by banks to restore confidence. In America, quasi-federal bodies known as Freddie Mac and Fannie Mae perform a roughly similar function.

AGAINST: Again, the price could be unacceptably high if things go wrong. Even the US Treasury and the British Government could find the strains of dealing with write-offs of hundreds of billions difficult to manage in a worst-case scenario. The “kite-mark” is more realistic but less effective; markets aren’t stupid and they don’t need the Government to tell them the risks they’re running.

VERDICT: Wasn’t Northern Rock enough?

7. Relax all the rules on lending

FOR: It would allow more enthusiastic property buyers into the market.

AGAINST: Isn’t this how we got into this mess in the first place?

VERDICT: It raises a wider question about whether the job of the authorities should be to “save” markets, if it means just going back to bubble conditions. Immoral too, when so many homeowners were sold loans they couldn’t afford to repay by banks that sold the risk on to unwitting investors. Moreover, cuts in interest rates seem geared to appease angry stock or property markets, surely a fairly primitive and ultimately self-defeating way of running an economy.

8. Bail out, don’t repossess

FOR: Not such a strange idea. Until 1996 the Government paid housing benefit on mortgage interest payments to the unemployed, which tended to mitigate the impact on individuals and the economy as a whole of a catastrophic drop in values. The Council of Mortgage lenders has floated the idea of something like this again to prevent a rash of repossessions and misery.

AGAINST: We found out in the last recession how expensive this can be, partly because the average mortgage, even 15 years ago, had mushroomed. Thus when the cost of this social security benefit rocketed from £31m in 1978 to £1bn in 1995, it was dropped for all future mortgage holders.

VERDICT: You might wonder why the taxpayer should pay anyone’s home loan off, but it could be a pragmatic way to prevent an even more gruesome calamity.

9. Order banks to reveal losses

FOR: The idea of such “transparency” is now commonplace and rarely far from the lips of any politician or regulator. The banks’ collective reluctance to say how much they had lost and where did contribute to a climate of uncertainty and a feeling that no one could quite trust anyone, and a further twist in the cycle of mistrust that gave us the credit crunch. Even some of the most august names in banking were caught up in a welter of malicious rumours, and their integrity questioned.

AGAINST: Nothing, except to note that the credit crunch is a process rather than an event. Even if the banks owned up to their losses and with casualties such as Northern Rock and Bear Stearns that is not the end of the tale. But no one knows how or when the US property market will bottom out.

VERDICT: They can tell us more, but not everything, not until it’s all over.

10. Spend, spend, spend!

FOR: A splendidly traditional way to get a struggling economy moving, as recommended by the great John Maynard Keynes in the 1930s. Even the fiscally conservative George Bush has approved a $156bn (£80bn)fiscal stimulus for the US economy, mainly through tax rebates, to get the US consumer buying again and avoiding the worst of a recession.

AGAINST: Britain’s public finances are not in a state to withstand that sort of pressure. Even as things stand the Chancellor, Alistair Darling, will probably break one or other of the Government’s self-imposed fiscal rules over the next year or two. Bodies such as the Institute for Fiscal Studies and the National Institute for Economic and Social Research point out that the rule setting net debt at 40 per cent is arbitrary.

VERDICT: Gordon Brown may just regret not saving a little for a rainy day.

Secured loans play catch up with personal loans 
Yahoo Finance
Rates on secured loans are becoming more competitive than those on the average personal loan, according to financial comparison website MoneyExpert.

Research from the website found the average APR on a £15,000 unsecured loan is around 8.44%, (Advertisement)
 
while secured loan customers people who secure a loan against their property looking to borrow the same amount, can get interest rates of 5.9%.

Furthermore, there has been an 85% increase in homeowner loan applications in the quarter ending January 2008, compared to the quarter ending October 2007, MoneyExpert said.

Sean Gardner, chief executive of MoneyExpert, said: Historically, secured loans were seen as something of a product of last resort. But these days they are far more attractive to homeowners who are looking for a competitive rate of interest. While these low rates can include an arrangement fee of as much as £995, the monthly savings to be made by opting for a homeowner loan can still be substantial.

Factsheet: Personal loansguardian.co.uk

Types of loans

There are two main types of personal loans: secured and unsecured. Unsecured loans are not tied to any of your assets, but secured loans are - usually to your property, which is why they are often called homeowner loans. If you default on a secured loan, your lender can force you to sell the asset to pay off your debt. Car loans are also secured loans, with the lender using the vehicle you are buying as security for the loan.

Homeowner loans are tied to a property. Photograph: Frank Baron Most lenders offer unsecured loans of between £5,000 and £25,000, although some cap borrowing at £15,000. Smaller loans are available if you shop around, but if your borrowing requirement runs into hundreds of pounds rather than thousands there may be better ways to borrow the money.

If you want to borrow more than £25,000, you will need a secured loan. You will also need enough equity in your property to secure the loan.

Interest rates

The APR (annual percentage rate) on a loan is the amount you will pay in interest each year. Most adverts for loans tend to quote a “typical APR”; you will not necessarily get the same rate of interest when you apply.

Unless you choose a lender with a “one-size-fits-all” interest rate, factors including how much you want to borrow, how long you want to borrow it for and your personal and financial circumstances will all have an influence on how much you pay.

A bank has to have offered its typical APR (or a better rate) to at least 66% of potential customers.

Interest rates can be fixed or variable, and it is important to know which you are signing up for. A fixed rate will remain the same for the term of the loan, which means your monthly repayments will remain the same.

A variable rate will be subject to change, usually in line with the Bank of England base rate. While this is good news when rates are falling, it can be worrying if rates go up and you need to find more money than expected to make your repayments.

Repaying your loan

Most loans are repaid in monthly instalments & usually by direct debit - over a period agreed before you get the money. The lender will tell you how much you need to pay each month when it agrees the loan.

The repayment period is usually fixed and you will have to pay a redemption penalty - for example, two months’ interest - if you want to pay it off sooner. The longer the repayment period, the more interest you will be paying, so go for the shortest you can manage.

Flexible loans, which let you borrow and pay back at will, are becoming more common, but the interest rate charged is often significantly higher.

If you miss a payment the lender will record the default on your credit file. Any new lender may not be put off by one or two missed payments, but if you have missed several you may struggle to get credit elsewhere.

Where to get a loan

The list of organisations offering loans is long and ranges from high street banks, to those that operate only on the internet or telephone, to building societies, credit unions, specialist loan companies and even doorstep lenders.

Typically, cheaper deals are offered by the specialists and internet banks than are available on the high street, but this is not always the case so you should shop around, either online or by contacting lenders to get quotes.

Some Doorstep loans have interest rates as high as 900%. Photograph: Garry Weaser Possibly the most expensive form of credit is offered by doorstep lenders. Unlike mainstream lenders, they will often offer sums of less than £50 - typically used to cover unexpected purchases - and collect payments weekly. However, APRs can be as high as 900% so borrowers who have a choice will tend to avoid them.

Credit unions are an alternative to mainstream lenders and can be an attractive option for some borrowers because they cannot charge more than 2% a month on the reducing balance of the loan (an APR of 26.8%), and most charge just 1% a month (12.7% APR).

Most credit unions offer unsecured loans for up to five years and secured loans for up to 10 years.

Getting into difficulty

Sometimes things go wrong and it is difficult to meet your monthly repayments. If this happens to you, do not ignore letters arriving through your front door.

The best course of action is to get in touch with your lender immediately. Banks and building societies are often willing to help and might offer to freeze the loan temporarily or extend the repayment period.

Their ultimate aim is to recoup their money, but it is usually more advantageous, including cheaper, for them to reschedule your repayments than to take action against you.

It is particularly important to be upfront with your lender if you have a loan secured on your house or another asset, because if things go wrong you may have to sell up to pay back the loan.

Organisations providing advice

Consumer Credit Counselling Service: a charity offering free, confidential advice for people in debt through its national telephone helpline - 0800 138 1111

Citizens Advice Bureau: free, impartial, confidential and face-to-face advice available via more than 3,000 outlets around the UK.

National Debtline: telephone helpline on 0808 808 4000 providing free, confidential and independent advice on tackling debt.