Personal loan or further advance?

• Guides
• Published: 14 Aug 2008 in Money and General

Personal loans are unsecured or secured lending taken by borrowers for various purposes. Lenders award a specific loan amount to the borrower with a defined repayment period. Borrowers pay back the capital and interest on the loan with monthly payments over the life of the loan.

If a borrower has a good credit history, he or she can generally obtain an unsecured loan up to £25,000. Bad credit borrowers or loan amounts over £25,000 usually required secured property. This means the borrower must expose his or her property to a second charge against it in order to get the desired loan amount or rate.

Further advance

A further advance, also known as a second charge, or home owner loan, is a loan in which the borrower extends the amount of credit secured by their property. A further advance is secured by the first mortgage deed and adds an additional claim against the borrower’s property in the event of non-repayment of the loan obligation. Secured loans usually include longer repayment periods, up to 25 years, lowering monthly costs. Unsecured loans over £10,000 often range from 7 to 10 years for repayment.

Similar to personal loans, further advances are commonly used for home improvements, childrens’ university fees, holidays, business investment – in fact, just about anything really! The most important thing to remember is that you need to be sure the purpose of the loan is significant enough to outweigh the risk of property involved to acquire the loan. Obtaining a further advance requires a high equity to mortgage ratio. Further advance interest rates are relatively low because they are secured, but they are usually not quite as low as the first mortgage rate, which has a higher lien priority.

Unsecured personal loan

Many homeowners prefer not to risk their property and wherever possible will opt for an unsecured personal loan, which will cost more in interest repayments but puts them under less worry that should they become unable to repay the loan, that their home would be seized.

Of course, on the other hand, the benefits of securing a loan are great enough to inspire borrowers to take on the risk. It really is up to you as to whether you choose a further advance or an unsecured personal loan.

Further advances require equity. For those that have equity in their home, this loan option is usually suited to individuals with a poor credit history; those looking to consolidate their debts; or those who want to borrow a large sum.

With debt consolidation, the goal is to pay off high interest debt, so the secured rate advantages might be worth the risk. Those with bad credit may have to secure the borrowing to get the desired loan amount. Borrowers seeking over £25,000, regardless of credit history, would likely need to secure.

As with all financial decision, you must assess your situation; examine all loan options carefully, and weigh up the risks and costs versus the benefits of the loan.

• Borrowers who choose a further advanced, or secured personal loan, need to realise their homes are at risk if they fail to keep up with their repayments.
• To this end, having savings or a safety net in the event of lost income, illness, or other emergencies is important.
• Without the back up plan, the risk of losing your home may outweigh the benefits of the loan.