The Consumer Credit Act 2006 resulted in some significant changes to the secured loan industry. Before this Act came into place secured loans under £25,000 were classed as regulated loans and were bound by the then regulations of the consumer credit act, and loans above £25,000 were classed as unregulated so the terms and conditions could vary significantly from one lender to the next.
The main differences for secured loans taken out before the more recent act came into place were consideration periods and early settlement charges. Before the 2006 act secured loans for amounts up to £25,000 would have to be taken out as part of a regulated agreement. This meant that the borrower had to have an 8 day consideration period, therefore it was a legal requirement for the customer to have a copy of their credit agreement at least 8 days before they were able to sign the original document. The reason for this was to provide some protection to the borrower because they were taking out a loan agreement that was secured against their home. By having at least an 8 day consideration period the hope was to prevent people taking out secured loans on a sudden whim. Despite being a form of protection for the borrower, the consideration period also often caused hardship to borrowers who needed to raise money quickly, so that they could pay an urgent debt or to snap up a bargain.
The regulated agreement also stated a set method for calculating early settlement figures. The method to be used was the Rule of 78, and this standard requirement for a regulated credit agreement was there to protect the borrower from extortionate redemption charges. However the Rule of 78 was a very complicated method of calculating settlement figures, and it wasn't understood by most customers. People often wrongfully felt safe in that regulations were protecting them from expensive settlement charges, when in actual fact the Rule of 78 was not only complicated it could also be very expensive, especially if clearing a loan early that was initially taken out over a long repayment term.
Loans above £25,000 were unregulated so the lenders would opt for their own early settlement charges which would be specified in each agreement. In fairness most of the main lenders had easy to understand settlement calculations that were much more favourable to the borrower than the Rule of 78.
Since the Consumer Credit Act 2006 has come into force all secured loans using the security of a borrower's residential property have become regulated, regardless of size. In addition the Rule of 78 has been abolished and replaced with a simpler method of calculating early settlements. The new method, in simple terms, is basically the balance outstanding plus about 1 month interest. This new early settlement calculation is a lot more beneficial to borrowers, meaning that lenders are losing out. Consequently many lenders are now charging arrangement fees for setting up a secured loan. These arrangement fees are added to the loan, and are therefore included in any settlement figure.
KIS Finance are an established finance brokers who can provide extremely competitive interest rates on secured loans and alternative finance options like bridging loans and development finance.
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