You need a loan: to buy a car, to do some home improvements, to pay a big tax bill, or inject some money into your business. What’s the right “loan product” for you?
Your personal borrowing options are to use your credit card, take out a personal loan, or get a second-charge mortgage.
Each of these are usually offered by different providers, so it can be hard to get the right kind of “you don’t need that – this would suit you better” advice.
Let’s deal with the first option quickly:
Using your credit card
It’s instantaneous and convenient.
If you’re able to repay all your credit card balance every month, this is a very cheap form of borrowing.
- But if you’re already looking for an additional loan you’re probably not repaying your whole credit balance every month. In which case credit cards are a very expensive form of personal borrowing: annual interest rates upwards of 17%.
- And the average credit limit of around £7,000 may not be enough to cover what you’re looking for. Unless you’re a “high net worth” customer with an almost limitless solid platinum card – in which case many doors are open to you, and the red carpet is rolled out.
Your next options are a personal loan, or an additional mortgage on your property.
Taking out a personal loan
For many people this is the obvious first-port-of-call: ask your own bank, or indeed any lender, for a straightforward loan.
You can usually apply online
You may get same-day approval
Rates may be as low as 2.8% ( going up to around 13%)
- A lender will want to know what you’re borrowing for – and may turn you down for some reasons (such as consolidating debt, or investing in your own business).
- Most high-street personal loans are unsecured. That sounds risky, but “security” is for the lender, rather than you. An unsecured loan isn’t tied to your home: if you can’t repay, the lender doesn’t have the automatic right to claim your home.
- The lowest rates are usually for larger loans of £15-£25K. In general, it “costs less to borrow more” – but you don’t want to take on more debt than you need, or can afford.
- Repayment periods are usually shorter: up to 5 years – which could sound too soon for you.
Taking out a second-charge mortgage
Sounds complicated: why would you?
A second-charge mortgage is a second (additional) mortgage on your home, from another lender.
If you’re on an attractively low fixed-rate mortgage you may have thought of getting a “further advance” on your current mortgage. And you may have been turned down, or found that it would involve re-mortgaging the whole amount at a new, higher rate, with arrangement fees on top.
Second-charge mortgages used to be seen as a last-ditch option, and were priced accordingly. But their interest rates have been dropping, and the rates are now looking very competitive compared with personal loans: currently as low as from 3.8%.
As a mortgage, the repayment periods are much longer than for a personal loan – up to 25 years. The lower monthly costs could look very attractive for you. But because you’re paying the interest for much longer, the overall cost of borrowing money this way will be much higher than a personal loan.
- It’s a “second-charge” mortage because this lender comes second in line for repayment after your first mortgagor (if for any reason you’re unable to repay and they’re going to sell your home to reclaim the debts). So the rate for this mortgage will be higher than for your main mortgage.
- This is a “secured loan”. That makes it riskier for you because it’s secured for the lender, against your home: they can sell your house to get their money back. So this is not a decision to be taken lightly – you should explore all the other options first.
What to look at when comparing personal loans and 2nd-charge mortgages
- Don’t just look at the headline interest rates. Look at the repayment period: 5% over 20 years is more expensive than 10% over five years.
- You need to take the time to work out the interest cost for you, over the period you realistically expect to repay this debt. Twenty-five years is a long time to be paying even a comparatively low rate of interest.
- Will you be allowed to repay the loan sooner without penalty charges?
- Are there any other extra costs: like needing to increase your life assurance because you’ve increased your mortgage?