Secured loans & the base rate cuts

Why aren`t secured loans coming down in price? As the Bank of England cuts its base rate again and again, many would-be borrowers are asking why lenders aren`t passing these cuts on to borrowers in the form of cheaper - and more readily available - secured loans.

A few points about secured loans

First of all, there`s the question of cost. Loan providers aren`t really seeing their own costs coming down. The APR (Annual Percentage Rate) which a secured loan charges isn`t necessarily linked directly to the Bank of England`s base rate, as secured loan providers may get their own money (`wholesale funding`) from other sources, such as private investors.

Second, there`s the question of availability. Loan providers are currently being very cautious about handing out secured loans, which means there`s less of a reason for them to compete against each other with low interest rates. So why are they being so cautious?

• They aren`t likely to offer a secured loan that would leave someone with equity worth less than 20% of their property`s value - so someone with a £70,000 mortgage on a £100,000 flat might be able to borrow £10,000 through a secured loan.

After all, a secured loan is (in general) cheaper than an unsecured loan because it`s secured against property, so lenders want to be sure that a property is worth more than the total of the loans secured against it. When house prices are falling, this means they have to think about where they`ll be a year or two from now, so many homeowners no longer qualify for one.

• Also, a secured loan is a `second charge` on a property. A mortgage, meanwhile, is a `first charge`, which means it`s the highest priority. If the property is repossessed, the secured loan provider won`t be repaid the money they`re owed until the mortgage provider has received all the money they`re owed.

Think Money work with a panel of lenders to offer a range of loans. If you are thinking about getting a loan, contact one of our expert loan advisers today.

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