A secure future
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In the past, the mere fact that consumers sought to secure funds against their properties suggested they were far from financially secure. This led brokers to assume that the opportunity to advise on secured loans had gone.
A more fundamental misconception was that secured loan providers did not understand client needs.
Historically, accusations of high management charges, early redemption fees and high interest rates were common. The sector was often seen as more of a threat than an opportunity and more likely to deny revenue than create it.
Despite these misconceptions, the commercial potential of this sector is finally being noticed. There is a growing trend among brokers to expand their portfolios, providing lending solutions to help clients move from a shaky financial position to greater strength by accessing a source of disposable funds.
This is a far cry from the situation seen in the past. During the early 1980s the UK housing market was flourishing. House prices were rising, consumer spending was high and public confidence soared.
But it didn't last. By the early 1990s, Britain was in recession. Many home owners found themselves in negative equity, overstretched and in many cases facing repossession.
For the first time in their lives, people with impeccable credit histories were finding themselves in financial difficulty and there was little they could do about it.
By the turn of the millennium, equity in property had been built back up and the market was borrowing again. But harsh lessons had been learnt and lending criteria remained tight. And for those possessing a poor credit history, remortgaging was too expensive an option.
At that point the secured loans sector was still in its infancy, so the plight of the financially disadvantaged remained unanswered.
But enterprising companies recognised the development of a new area of demand - financially-impaired customers with means, who needed to wipe the slate clean and start again.
As the housing market recovered, the need for financial relief began to subside. But secured loans had proved their worth as a valuable way to turn dormant assets into cash.
Critically, the approach was accept-ed as a viable solution for funding all sorts of expenditure.
But ever since the advent of mortgages, the concept of borrowing money against the value of property has been accepted.
For as long as there has been money there has been credit, and the long-term nature of property has always made lending against it a safer bet. And with lower risks come lower costs.
This has been the main reason for the growth in popularity of secured loans - they cost less, they can be borrowed over longer periods of time and they can provide access to higher levels of funding.
There can be no doubt that the greatest use of secured loans is still to consolidate debt.
The proliferation of unsecured credit sources and the relative ease with which they can be accessed has fuelled a huge rise in the amount that British people borrow.
Unchecked, such borrowing can leave people paying out more than they can afford and financial difficulties will soon follow.
But in conjunction with a debt management strategy, secured loans can often provide the most efficient way to recover an individual's financial position by replacing multiple expensive repayments with a single, cheaper loan amount.
But secured loans aren't just for the stricken and many home owners do not want to remortgage. Remortgaging can be more expensive, time-consuming and possibly detrimental if there are any skeletons lurking in consumers' financial closets.
Furthermore, property is being increasingly seen as a savings vehicle, accumulating funds that can be drawn upon as and when needed.
While equity provides a valuable fallback in any financial portfolio, it can also offer more efficient solutions to many other monetary problems.
For example, many home owners are now turning to home improvements to avoid the costs associated with moving, particularly the pain of Stamp Duty.
Cars, holidays, weddings and other major forms of expenditure are also being funded more cheaply through equity in property. It can even be spread between alternative investments to improve efficiency and reduce risk across financial portfolios.
Given the wide range of uses available, it is not surprising that the supply of solutions has grown. Finding the right product to fit clients' needs, however, has become a specialist area.
The principle of secured loans is simple - a second charge is sought against the equity in an applicant's property so that an advance can be made. But in practice, finding the best solution can be more complicated.
Secured loan features vary in terms of interest rate, set-up charges and redemption fees. There are also de-ferred repayment schemes (borrow now, pay later), payment protection against missed payments and cashback loyalty bonuses to consider. But most significant are the lending criteria, which can vary enormously between lenders.
The starting point for identifying a lending solution is a thorough analysis of applicants' circumstances. This will reveal sufficient information for clients to be mapped to potential products and lenders.
Interest rate is usually the determining factor for choosing a loan but it's not the only one. Depending on circumstances, clients might be motivated to choose a cashback facility or an early redemption option above the monthly cost of repayments. The point is that the solution should be tailored to the individual.
As is often the case when providing financial services, complexity in the market has resulted in increasing specialisation. Dedicated organisations now offer bespoke search solutions that allow them to work quickly and efficiently.
Technology has taken away much of the strain and the process of obtaining loans can run almost seamlessly from initial enquiry to final payout.
The development of this expertise and the way it operates delivers a number of advantages to brokers.
The important thing to consider before dismissing secured loans as an option for clients is that they may be more appropriate than initially thought.
Contrary to the negativity, clients in need of secured loans cannot be stereotyped, with most varying widely in terms of both their credit records and financial means.
But of course, commerce will be an important consideration for brokers. Experts agree that one of the strongest commercial strategies in customer segmentation is client development.
Most brokers will be familiar with the use of fact-finds, both to provide the foundation for good advice and also to identify potential problems and their solutions.
And yet, many brokers' clients still require a different solution to that being offered.
Therein lies the inevitability of partnerships. By being aware of the advantages that secured loans can bring and anticipating the needs their clients might have, proactive brokers can develop another string to their bows.
This will not only create a direct source of income, but will also help build stronger customer relationships.
Steve Teague is managing director of Click
The secured loan versus remortgage battleOne of the more common scenarios where clients require a secured loan is when there is insufficient equity in their homes for remortgaging.
Consider the following. A client has a mortgage balance of £140,000 that they purchased 12 months ago. The property has been valued at £155,000 and the client also has £25,000 of credit card debt, with repayments costing £625 each month. To reduce these, the client can take out a £25,000 secured loan over 120 months on a rate of 8.7% APR, which would equate to a monthly payment of £308.79. This would deliver savings of almost £320 a month.
Another common situation is where a client wishes to borrow cash in the middle of their mortgage term (typically over 10 to 15 years), but does not want to remortgage as the total amount of interest paid over the longer term would be greater, even at a lower rate.
A customer who wants to borrow £25,000 over 10 years and remortgages would have to repay £44,679, based on borrowing the sum over 25 years at a fixed rate of 5.19%.
However, £25,000 over 10 years as a secured loan would equate to a total amount payable of £36,025.20, based on 8% APR - the client would save nearly £8,700.
The figures in these examples do not include payment protection plan premiums and are based on the Firstplus loan Plan 1 with no fee. Rates are also variable.
