Many individuals that have a bad credit rating turn to a secured loan, second charge or homeowner loan to raise finance. A second charge enables a borrower to utilise available home equity to perform home improvements and debt consolidation.
The lender will register a second charge with the Land Registry. In the event of a private sale or house repossession, the lender is entitled to their share of the sale proceeds once the primary mortgage lender has been paid off in-full.
Advantages of a Second Charge
- Reduced monthly repayments on debt. Many individuals are struggling with multiple forms of high APR personal debt, such as credit card debt and unsecured personal loans. A second charge can help with debt consolidation and is likely to reduce monthly repayments.
- Bad credit rating. Those with a bad credit rating are likely to find it difficult to borrow money. The provision of collateral allows a borrower to get a homeowner loan.
- Single monthly repayment. A single monthly repayment on a secured loan is considerably easier to manage than multiple personal debts.
- Borrow more. As a second charge or secured loan gives the lender collateral, it is possible to take out a larger homeowner loan. However, the amount that can be borrowed will depend heavily upon how much equity is available.
- Lower APR. The provision of collateral means that, even those with a bad credit rating, are likely to find that they can get a more favourable rate of APR on a homeowner loan.
Disadvantages of a Second Charge
- Secured loan. A second charge or homeowner loan is secured on the family home. In the event of loan default, it isn’t possible to use a debt solution to escape financial difficulties.
- Additional debts. Whilst a second charge helps with debt consolidation, it can create additional personal debt if existing sources of credit aren’t closed down.
- No equity available. Falling house prices mean that there is less home equity available for a second charge. If no home equity exists, a homeowner loan or second charge isn’t going to be approved by a lender.
- Negative equity. A second charge can mean that a person falls into negative equity sooner. The creation of negative equity can also make it virtually impossible to move house and increases the risk of house repossession. According to the Halifax house price index, house prices have fallen by 16.2% in the last 12 months.
- Variable interest rates. A second charge is likely to be less competitive than a mortgage and at a variable rate of interest. Although variable rates are a positive thing in a low inflation climate, it can cause potential problems moving forwards.
- Increased term. Although monthly repayments may be lower, a second charge or homeowner loan usually has an extended term. This only serves to increase the total amount of interest paid.
Whilst a second charge can help someone reduce monthly repayments or borrow additional money, it also increases the risk of negative equity and resultant house repossession. A debt solution, such as a debt management plan, may be a better alternative to a debt consolidation homeowner loan.