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Secured loans

Secured loans

We all have times where we need some financial support. If you can’t get a high enough balance on a credit card, and a personal loan isn’t an option, then a secured loan might be useful.

Anelda Knoesen
From the Money team
3
minute read
posted 17 MARCH 2020

What are secured loans? 

Secured loans are secured against an asset. This is known as collateral. The asset could be your car or something else of value you own, but it’s often the equity tied up in your home. These types of secured loans are often referred to as homeowner loans or second-charge mortgages. They can be cheaper than unsecured loans because they’re less risky for lenders.  
 
A secured loan typically allows you to borrow a larger sum of money, for example, over £10,000. Like other loans, you’ll need to make monthly repayments, plus interest which is calculated as a percentage of what you owe. As long as you can keep up with the repayments, you won’t be at risk of losing your home. But if you fail to make the repayments, your home, or any other asset you’ve used as collateral, could be at risk of repossession. 
 
A secured loan enables homeowners to use the equity in their home as a finance tool. This might be for: 

  • a major home improvement project such as an extension 
  • extra funds to buy a second property 
  • university fees 
  • funding for a business 
  • funding if poor credit means it’ll be difficult to get a personal loan 

What are the types of secured loans? 

The type of secured loan you choose depends on whether you want a fixed or variable rate: 

  • Fixed-rate secured loan: Repayments and the interest rate charged are fixed for a set period. At the end of the agreed fixed-rate term, you’ll be charged the lender’s standard variable rate (SVR), which means your repayments could go up or down.  
  • Variable rate secured loan: Your monthly repayments could go up or down according to changes in the Bank of England base rate.  

How much can I borrow with a secured loan? 

With a secured loan you could typically borrow anything from £5,000 up to £100,000. Some specialist lenders may offer higher amounts. You can use Compare the Market to compare secured loans up to £100,000.   
  
If you need funds for a major expense – for example a new kitchen or bathroom – and you’re sure you can make the repayments, this could be an effective way to raise finance. A secured loan might also be an option if you need to consolidate debts from credit cards, overdrafts or unsecured loans with higher interest rates.   
  
Find out more about debt consolidation loans

Why should I choose a secured loan? 

Taking out a secured loan could mean that you: 

  • get a relatively low rate of interest 
  • are able to borrow a larger sum 
  • may be able to borrow without a high credit rating 
  • get a longer repayment term than you would with a personal loan – although this could mean you pay more interest overall 

As with all loans, the exact rates you receive will depend on your personal circumstances, so be sure to look around for the best secured loan for you. You may be able to borrow without a good credit rating, but you’ll probably be offered a higher interest rate. 

What are the risks of secured loans? 

  • If you miss repayments, you could lose your home.  Make sure you understand the risks, as some lenders may act quickly to get their money back if you miss payments.  
  • Repayments could increase if your loan has a variable rate.  Most secured loans have variable rates, which means that if the Bank of England raises the base interest rate, your rate will probably increase too. Consider if you’d still be able to afford the loan if this were to happen. Unsecured loans are usually fixed-rate loans  that give you the security of always knowing what you’ll pay each month.  
  • Arrangement fees  and other associated charges can be high. 
  • Repayment on a short-term fixed-rate loan will switch to the lender’s SVR once the agreed term comes to an end. This could mean higher repayment costs if interest rates go up.  
  • As well as the risk of losing your home, defaulting on a secured loan could be put on your credit report. This could make it far more difficult to borrow money in the future.   

If you decide to take out a secured loan, look at the  total amount repayable, as well as the headline APRC (Annual Percentage Rate of Charge). The APRC is the rate of interest, taking into account all fees, costs and any introductory rates on a mortgage or a secured loan. It can be helpful to look at the APRC when comparing the cost of loans. Also, make sure you’ve read the fine print and understand the missed payment terms in case the worst happens. 

What else should I look for in a secured loan? 

Before you apply for a secured loan, you should also consider: 

  • Eligibility: In many cases you’ll need to be resident in the UK and be between 21-65 years-old to be eligible for a secured loan.  
  • Early repayment fees: If you want to pay your loan off early, you may have to pay early repayment fees. 
  • Your financial situation: This could change over the term of your loan. Any future expenses, starting a family for example, could affect your ability to pay off the loan.  
  • Your loan-to-value ratio: Generally, the more equity you have in your property, the more you should be able to borrow. If you don’t have a lot of equity, the amount you can borrow will be limited.  
  • When you apply for a loan, a hard credit search is almost certainly going to be performed. This will go on your credit report and could temporarily lower your credit score. 
  • Be aware of the advertised APRC. This is usually a representative rate which lenders only need to give to 51% of successful applicants. If you’re one of the other 49%, you may be charged a higher rate.  

What are the alternatives to a secured loan? 

Other alternatives to consider are: 
 
Remortgaging 

If you’re looking to use your home to raise extra funds, remortgaging may also be an option. Find out more about remortgaging your home in our guide. 
 
For smaller amounts, you might want to consider: 
 
An unsecured personal loan 

You could borrow money without the need to secure the loan against your home or car.  

Guarantor loan 

A guarantor loan is another type of unsecured personal loan. It’s guaranteed by someone such as a family member, who promises to pay back the debt if you’re unable to. This can be a good way of securing a loan if you have a poor credit history. Typically, the amount you can borrow is between £1,000 and £10,000. 

What is the difference between a secured and unsecured loan? 

The main difference is that an unsecured loan doesn’t have an asset that lenders can claim if you can’t pay the loan back. As there’s no collateral to secure the loan, lenders tend to consider unsecured loans as a higher risk than a secured loan.  
 
In most cases, you’ll only be approved for an unsecured loan if you have a good credit rating.  
 
Unsecured loans usually only allow you to borrow up to £50,000, and repayments are usually spread over a shorter period of time – typically no more than six years. Interest rates also tend to be higher for unsecured loans.  

Can I get a secured loan with bad credit? 

Yes, it may be possible to get a secured loan with bad credit. That’s because you’re offering an asset – your car for example – as collateral in exchange for borrowing the money.  
 
If you’ve got a poor credit history, it could be easier to get approval for a secured loan.

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Let us do the legwork. Compare secured homeowner loans now and find a deal that could suit your needs. 

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