Both mortgage protection insurance and loan protection insurance are usually sold as secondary products to the customer at the same time as the main loan or mortgage is arranged. They are regarded as being secondary to the main financial arrangement and are taken out to support the credit arrangement.
For the customer, the mortgage protection insurance or loan payment protection may well be a tertiary (third) product. The customer may be first buying a House (primary purchase), then getting a mortgage (secondary purchase) and finally mortgage protection insurance (tertiary product).
There are many forms of arranging credit. These are some of the main types.
- Personal loan,
- Hire purchase,
- Secured loan,
- Mortgage,
- Credit card,
- Other continuous credit,
- Overdraft.
Personal loan
These loans are usually for a fixed amount of money over a fixed period of time. The interest rate is set at the beginning of the loan arrangement and usually does not change during the loan period. Typically these loans are less than £10,000 in value and last for less than five years.
Hire purchase
These are taken out to cover the purchase of a specific item, such as a car. The loan agreement specifically mentions the item purchased and the ownership of that property does not pass to the borrower until a large part of the loan has been repaid.
Repayment periods tend to be less that five years and average loan amounts less than £10,000.
Secured loan
These loans are for a specific amount and period of time, usually with a fixed repayment period. The loan is secured by a legal second charge taken out on the customer’s house, with the mortgage being the first charge on the property.
These secured loans are usually taken out for longer periods and for larger amounts, with the lender enjoying the added security they offer. This lower security risk is then converted by the lender into a lower interest rate for the customer. It is this approach, with benefits to both sides, which has made this form of loan so popular and a growth area since the late 1990’s.
Mortgage
Mortgages allow customers to purchase property, usually their home, and secured the mortgage used to purchase the property on the home/property. As would be expected mortgages are usually for large amounts and as a result spread over a longer period, with 25 years not being uncommon.
Credit card
With these cards the customer is allowed to borrow up to a fixed limit of credit, which they can use to draw cash or purchase items and goods. Interest is applied to the outstanding debt balance at the end of each month.
Repayments are not fixed, but there is usually a minimum repayment amount that must be made, based as a percentage of the outstanding balance.
These credit cards are sometimes known as continuous or revolving credit.
Other continuous credit
Example of these are store cards and catalogue accounts where a credit limit is set, and monthly repayments are made based on the outstanding balance. With catalogue accounts the amount may be based as a certain repayment figure on each item purchased. These arrangements are similar to credit cards, but are tied to the store or catalogue account concerned.
Overdraft
Overdrafts are the amount of negative balance in a person’s bank account. The preferred arrangement is for the customer to agree the amount of overdraft limit with the bank before hand, so that when it is required, they can go overdrawn by up to that amount. These are termed overdraft arrangements and the bank will set out their charges, which may vary over time with the banks lending and charging policy.
If the overdraft arrangement has not been agreed in advance the bank will usually charge a much higher rate of interest, and may add on extra administrative bank charges. Any overdraft not previously agreed, allows the bank to request immediate repayment.