Borrowers turn to personal loans to pay for home improvements to avoid new stricter mortgage rules

Homeowners are turning to jumbo personal loans to fund loft conversions and home improvements because they don’t want to face tough new mortgage rules.

Brokers and lenders have reported a surge in the number of borrowers taking personal loans of £20,000 and more to pay for home improvements.

They say many are taking out these deals, instead of extending their mortgage or taking a second home loan, because they don’t want to go through new lending tests. Home extension: Brokers and lenders have reported a surge in people taking out loans of £20,000 and more instead of mortgages to pay for home improvements

Home extension: Brokers and lenders have reported a surge in people taking out loans of £20,000 and more instead of mortgages to pay for home improvements

Others fear building work could be delayed for months because of delays in getting a mortgage, compared with personal loans, which are granted almost instantly.

Mortgage borrowers now face two-hour interviews and a strict check of their finances to extend their mortgages by just a few thousand pounds after the City watchdog ordered a crackdown in April.

Even those with high salaries are being turned down for modest amounts because they no longer pass affordability tests.

But personal loans are not covered by the same tough rules, so lenders need only make a few basic credit checks on customers. This means they are surging in popularity.

Nigel Bedford, of broker Large Mortgage Loans, says: ‘Personal loans are not right for everyone, but for those looking to borrow smaller amounts on their mortgages they can work out quicker and easier than going through a mortgage application under the current rules.’

In some cases, customers turned down for mortgages are being told they can instead take out a personal loan by the same bank. In one example, a couple refused an extra £50,000 on a £100,000 mortgage claim were told by the same bank they could take out £25,000 each with a personal loan.

While mortgage rates have crept up over the past year, banks have been slashing personal loan rates.

This month HSBC cut the rate for loans between £7,000 and £15,000 to 3.9 per cent. This is less than the average five-year fixed mortgage deal, which now stands at 4.2 per cent, according to data firm Moneyfacts. However, it applies only to existing current account holders.

Source : This is Money



Secured and unsecured borrowing explained

A secured loan is money you borrow that is secured against an asset you own, usually your home. The interest rates tend to be cheaper than with unsecured personal loans, but it can be a much riskier option so it’s important to understand how secured loans work and what could happen if you can’t make the payments.

Secured loans explained

Secured loans are often used to borrow large sums of money, typically more than £10,000 although you can borrow less, from £3,000. The name ‘secured’ refers to the fact that a lender will require something as security in case you cannot pay the loan back. This will usually be your home.

Secured loans are less risky for lenders, which is why they are normally cheaper than unsecured loans. But they are much more risky for you as a borrower because the loan provider can repossess your home if you do not keep up repayments.

There are different names for secured loans, including:

    Home equity or homeowner loans
    Second mortgages or second charge mortgages
    First charge mortgages (if there is no existing mortgage)
    Debt consolidation loans (although not all debt consolidation loans are secured)

First and second charge mortgages

Debt consolidation loans that are secured on your home can be first or second charge. If it’s a first charge mortgage, it means you’ve taken out a loan for home improvement, for example, when you have no existing mortgage. Whereas a second charge mortgage involves setting up a new agreement with your existing mortgage lender or going to a different lender.

You can get a further advance on your mortgage – where you borrow an additional amount of money against your home from your current mortgage lender. This is an option if you’re looking to pay for some major home improvements or to raise a deposit to buy a second home, for example.
Increasing your mortgage – getting a further advance


You will normally pay a lower interest rate than with a personal loan because the loan is secured against your home. Your repayments are normally made on a monthly basis. However, the amount you pay each month will vary if the interest rate is not fixed.


Your home is secured on the loan, so you could lose your home if you cannot keep up your repayments. Some secured loans have variable interest rates, meaning your repayments could increase. Make sure you know if you’re going to be charged a fixed or variable rate. Some secured loans have expensive arrangement fees and other charges. Make sure you factor this in when you work out how much the loan is going to cost you. Arrangement fees and other set-up costs should be included in the APR (or APRC in the case of first charge mortgages). Use the APR to compare products but don’t just look at the APR.

Also consider how much you will pay each month, and in total, and whether you can afford this comfortably. Generally, you should avoid lenders who charge high fees. But in some cases a high initial fee could lead to a low interest rate, which may suit some people’s circumstances.

Unsecured loans explained

An unsecured loan is more straightforward. You borrow money from a bank or another lender and agree to make regular payments until it’s paid in full. Because the loan isn’t secured on your home, the interest rates tend to be higher.

If you don’t make the payments, you may incur additional charges. This could damage your credit rating. Also, the lender can go to court to try and get their money back. This could include applying for a charging order on your home.

How to get the best deal

 If you have decided that a secured loan is the best choice for you, then your first step should be to approach your mortgage lender to see what they offer. Some will offer special deals to those borrowers who have a good record repaying their mortgage. Next, check some comparison websites to see if you can get a better deal with another lender. However, bear in mind that comparison websites do not always offer the most comprehensive selection of deals. As well as researching the cost of borrowing, be sure to compare the terms and conditions and fees of each loan and what could happen if you are unable to repay.

 If you’re comparing lots of deals on a comparison site, check whether this will show up on your credit file. Some lenders will carry out a full credit check on you if you get a quote for a loan, so it looks like you’ve actually applied for the loan. If this happens lots of times, it could harm your credit rating.

How to complain if things go wrong

If you are unhappy, your first step should be to complain to the loan company. If you don’t get a satisfactory response within eight weeks you can complain to the Financial Ombudsman Service.

Source : Money Advice Service



Credit Score - How it works

A credit score is a number that indicates how likely a borrower is to repay future debts. Credit scores speed up the mortgage approval process for many people because they identify low-risk borrowers quickly.

The most common credit score used by lenders is the FICO® score, which ranges from 300–850. The higher the score, the better. The FICO score is generated by a mathematical formula (called a scoring model) developed by Fair, Isaac Corp. Your FICO score affects how much money and what loan terms (interest rate, type of loan, etc.) lenders will offer you at any given time. The scores are not based on human judgment. The scoring model applies the same standards to everyone.You have three FICO scores, one from each of the three credit reporting agencies: Experian, TransUnion and Equifax. Each of these private national agencies collects information about each consumer and keeps it electronically in an individual consumer credit record, called a credit report. To generate a FICO credit score, the credit agency runs the data in a credit report through its FICO scoring model. When the information on your credit report changes, your credit score tends to change too.

For your FICO scores to be calculated, each of your credit reports must contain at least one account that has been open for a minimum of six months. In addition, each report must contain at least one account that has been updated in the past six months. This ensures that enough information — and enough recent information — is in your report to generate a FICO score.

By law, you are entitled to receive one free credit report from each of the three national credit reporting agencies per year. You can order them or view them immediately online at — after you provide identification information. You also may order your credit score from each agency, but you will have to pay a small fee per score.

Each credit report (see examples from includes the following data, collected from creditors and public records:

    Identifying information (name, address, employer, Social Security number, etc.)
    Debt and payment history on credit cards, student loans, consumer loans, car loans, etc.
    Previous collections
    Tax liens, judgments and bankruptcies
    Inquiries for new credit

This is how payment and debt information ranks in your score:

    Payment History: 35 percent
    Amounts Owed: 30 percent
    Length of Credit History: 15 percent
    New Credit: 10 percent
    Types of Credit Used: 10 percent

These factors are NOT considered in credit scoring systems:

    Marital status
    Receipt of public assistance

Credit scores can vary

In general, when people talk about your "credit score," they are talking about your current FICO score. Many lenders get credit scores from smaller credit bureaus that typically get FICO scores from the national credit reporting agencies. However, some lenders generate their own credit scores or get them from a custom credit score developer. As a result, there is no one score used to make decisions about all borrowers. In addition:    Credit agency scores are not the only items used. Scores generated by lenders may include other information about you, as well as the FICO score. FICO scores are not the only credit agency scores. In addition to FICO, the three agencies may use different scoring models, although FICO scores are most commonly used in mortgage lending. Other types of national scores may evaluate your credit report differently, and in some cases a higher score may mean more risk, not less risk as with FICO scores.

Your FICO score may be different at each of the main credit reporting agencies. The FICO score from each credit reporting agency considers only the data in your credit report at that agency . If your current scores from the credit reporting agencies are different, it's probably because the information those agencies have on you differs. You should check your report at all three agencies once a year.

If any of your credit reports contains inaccuracies, contact the credit agency that compiled the report. All three agencies detail their dispute processes on their Web sites. The Fair Credit Reporting Act (FCRA) requires the agency to investigate your disputed items within 30 days. The credit reporting agency must provide you with written notice of the results of the investigation within five days of its completion, including a copy of your credit report if it has changed based upon the dispute. If ever you are denied credit, you are entitled to a free credit report.

The Federal Trade Commission (FTC) is responsible for enforcing the FCRA. The FTC also publishes consumer-related brochures where you can obtain additional information on credit reports.

To contact the FTC, call or write:

Federal Trade Commission
Public Reference Branch
6th Street and Pennsylvania Avenue, NW
Room 130
Washington, DC 20580
Phone: 202-326-2222

Know before you apply

When you apply for a mortgage, you can be better prepared if you get a copy of your three credit reports to review before your meeting. If there are any errors, you can take steps to correct them before you submit your application. If you have had credit problems, be prepared to discuss them honestly and come to your application meeting with a written explanation. Every lender knows there are unavoidable reasons for credit lapses, such as unemployment, illness or other financial strains. If you have had a problem but have worked with your creditors to correct it, and your payments have been on time for a year or more, you’ll probably have nothing to worry about.

If a lender asks you to pay off an account to improve your debt ratio, it typically takes 30 days for the new information to appear on your credit report. If you need to prove this sooner, talk to the creditor about getting a letter or ask the closing attorney to indicate the paid account on the closing statement. However, a lender may be bound by underwriting requirements imposed by an investor.

Source : Home Loan Learning Center



For Long-Term Auto Loans, How Long Is Too Long

Here's a disturbing question -- which lasts longer: the typical U.S. marriage or the average American car loan? According to The Economist, the average U.S. marriage lasts eight years. While six-year car loans are typical, eight year -- and even longer -- loans are growing in popularity. Experian says one-quarter of vehicle loan terms fell between 73 and 84 months last year, compared to just 11 percent of loans in 2008. So yes, car loans are beginning to give marriage a run for its money in the longevity department.

The most common term on new or used vehicles is the 72-month loan, comprising about 40 percent of the credit market. That's a substantial shelf life longer than the 36-month loan that launched the automotive finance industry. But Melinda Zabritski, senior director of automotive credit at Experian Automotive, says extended-term loans are not necessarily a bad thing. "Consumers tend to be monthly payment buyers," she said. "To keep that payment low, ... spread that payment out over a longer period."

Zabritski admits that you will pay more interest over the life of the loan, but she says consider the difference between the average rates on a typical loan amount at a 60-month term versus a 72-month loan: "You might only pay $500 or $600 more over the entire life of that loan but you'll save $50 or $75 a month. So the breakeven point comes pretty darn quick."

But average car loans are up nearly $1,000 from one year ago, to $28,381 -- the highest on record, according to Experian. The typical interest rate on a new vehicle loan was 4.5 percent, as of the fourth quarter of 2014. Put those factors together and the average monthly payment for a new vehicle hit $482, another record high.

Not only are vehicles more expensive, but consumer buying patterns have shifted, too. Entry-level crossover utility vehicles became the most-registered vehicle last year, followed by full-size pickup trucks, the usual top dog. During the recession, small economy cars were most sought-after by consumers though now, with the economy rebounding,

Americans are upsizing again.

What About That Loan?

Zabritski says the most important factor to consider is: How long do you really plan to keep that car? Experian says the average length of initial ownership is 93 months -- almost eight years. Apparently we keep our cars about as long as our spouses. But when consumers put little or no money down and then keep a vehicle for just three years, it's easy to owe way more than the vehicle is worth when looking to trade.

"The days of buying a new car every three to five years are gone," Mark Seng of IHS Automotive told CNBC in a recent interview. "With vehicles lasting longer and having more technology, buyers are clearly willing to own their cars six or seven years, often longer. The one risk for buyers taking out seven-year auto loans is the chance they'll be upside down and owe more than their vehicle is worth if they try to sell it before the loan is paid off."

Edmunds, the automotive research firm, notes that the average trade-in age for a car in 2014 was six years. "It's not what you'd call an enduring relationship," Ronald Montoya,

Edmunds consumer advice editor, wrote in a blog post. "If you have a 72-month loan and get the itch to buy a new car around the average six-year mark, you wouldn't have enjoyed any time without payments, which diminishes the point of car buying in the first place. At that point, you're better off leasing the car." And leasing is gaining popularity, accounting for nearly 30 percent of all new vehicles financed, according to Experian.

Resale Value an Issue

But Edmunds senior consumer advice editor Philip Reed notes another drawback to extended-term loans: resale or trade-in value.

"As a car depreciates, there are times when it depreciates steeply and other times when it's fairly flat," he said. "And you would like to trade it in at the end of a flat period rather than in the middle of a steep decline." He admits that every car is different in the manner in which it retains its value, but there are certain benchmarks to be aware of. "I would say that once you get past the five-year mark, not only is it depreciating quickly but you are also probably exceeding 100,000 miles." While that may not trigger a great deal of additional depreciation, he says it is "certainly a psychological barrier for many car shoppers."

If you're committed to long-term ownership and think an extended-term loan will work for you, Zabritski says it's important to shop rates and lenders before making a purchase.

And remember, interest rates typically increase along with a loan term.

"We always recommend for folks to go ahead and look at getting prequalified with their own banking institution -- credit union, bank or whatever -- so that when they go to the dealership they are armed with that information to know what's a good deal when it comes to obtaining a loan," she says.

Source : Daily Finance 



Payday Loans - How they work

Payday loans – what you need to know

Payday loans are an expensive way to borrow. Never take out a payday loan unless you’re 100% certain you can repay it on time and in full – otherwise the costs can soon spiral out of control. If you’re thinking of getting one, here’s what you need to know.

How payday loans work

Payday loans are short-term loans designed to tide people over until payday. The money is paid directly into your bank account. Normally you have until payday to pay back your loan plus interest, although some payday lenders let you choose the repayment period. On the repayment date, the lender takes the full amount you owe plus interest directly from your bank account. This happens even if you need the money to pay essential bills like mortgage or rent, heating and food. A payday loan will just make your situation worse if you can’t afford to pay it back on time. It may also affect your ability to get credit in the future.

What payday loans cost you

In the past, most payday lenders charged £25-30 interest per month for each £100 you borrowed. But this is if you paid the loan back on time. If you repaid late, they’d usually also charge a default fee of around £30 and daily interest on top. New rules introduced by the Financial Conduct Authority (FCA) from 2 January 2015 mean that borrowers will never pay back more than twice what they initially borrowed. This is to help address the problem of spiralling debts. Also, someone taking out a loan for 30 days and repaying the loan on time will pay no more than £24 in fees and charges per £100 borrowed.

There is also a cap on default fees. If you don’t pay your loan on time, the lender can charge you up to £15 in default fees plus interest on outstanding principal and default charge.

Source : MoneyAdviceService