Personal loans, car loans or remortgaging?

18 March 2010 17:18:34

Consumers should choose carefully between remortgaging and a personal loan.

Money has been tight for many households during the recession and some are now looking to secure a little extra cash with which to consolidate their debts, pay for necessary purchases or simply facilitate their day-to-day spending.

There are a number of ways in which consumers can borrow money, including taking out a secured or unsecured loan, remortgaging their home or, in the case of those looking to purchase a new vehicle, obtaining a car finance loan.

Secured and unsecured loans
The main difference between a secured and unsecured loan is that the former requires the borrower to provide some form of security to the lender, such as their home or car, while the latter does not entail any form of collateral. In the event that a person with a secured loan is unable to make their repayments, they forfeit their house or car so that the lender recoups its losses. In contrast, a borrower who fails to pay back an unsecured loan according to their repayment schedule will not necessarily lose their home or vehicle.

While the threat of losing their home may deter many potential borrowers from taking out a secured loan, it is important to bear in mind that the interest rates on unsecured loans tend to be higher to offset the additional risk borne by the lender. Furthermore, many applicants may be unable to obtain an unsecured loan as a result of having a poor credit history. For this reason, consumers should always obtain a copy of their credit report prior to applying for a personal loan, in addition to comparing personal loans to find the most suitable product.

Remortgaging or obtaining a secured loan
Consumers who are prepared to use their property as collateral to secure funds must decide whether to take out a new secured loan or remortgage their property. Remortgaging requires the borrower to take out a new mortgage loan, which is then used to pay off their existing mortgage loan.

Remortgaging can be an attractive option for many property owners, particularly if the interest rate on their existing mortgage is higher than typical interest rates at the time. However, there are costs involved, as the borrower is almost certain to pay an arrangement fee for their new mortgage. Furthermore, they may be required to pay an early redemption charge for paying off their existing mortgage early. Such fees can make a significant dent in any potential savings that would otherwise be made from the move.

Car finance loans
Another option for those purchasing a vehicle is a car finance loan. Many dealers provide car financing, but these should always be scrutinised with care. It can be tempting for a buyer to visit their local car dealership and agree to whatever car finance method they are offered, but it is best to compare personal loans before setting off in order to avoid being caught out. This is because an unsecured personal loan will often provide a better rate than dealers' car finance and could save buyers a significant amount of money.

As with any form of borrowing, the trick is to research available products before making a final decision. Consumers should also sit down and calculate the financial implications of the various methods of borrowing to work out whether remortgaging or a secured, unsecured or car loan would be most appropriate for them.

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