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.
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 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.
If you are struggling to manage your debts or finances, or simply just need some advice on how to borrow responsibly, Citizens Advice has a range of information, advice and support to help you keep on top of it all.
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.
- Short-term fixed-rate secured loan: These work as a blend between the previous two. You begin on a fixed-rate for an agreed period, usually somewhere between one and five years, before moving onto the variable rate, which means your rate can fluctuate alongside the Bank of England base rate, or the general market.
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.
To be eligible for a secured loan, you’ll need to have equity in your home. Equity is the portion of the home that you own outright and is worked out by simply deducting your mortgage amount from the value of your home.
What are secured loans often used for?
If you need funds for a major expense, and you’re sure you can make the repayments, this could be an effective way to raise finance. This could include getting a new car, or making home improvements such as an extension or a new kitchen or bathroom.
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. However, you should be aware that using a secured loan to pay off smaller unsecured debts may end up being more expensive, once the interest is considered. You’re also converting unsecured credit into secured credit which introduces the risk of having your property repossessed if you get into increased financial difficulty.
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.
How much do secured loans cost?
Every loan is different, which makes it impossible to give a one size fits all answer. It depends on several key factors:
- The amount you borrow – simply put, the more you borrow, the more it’ll cost
- The length of the term – if you’re borrowing over a longer period, you’ll be paying more in interest over the term
- Rate of interest – this will determine your monthly payments. Normally you can expect lower interest rates over longer-term loans, but the overall cost would still be higher. You should look for the lowest interest rates possible, but consider the right balance between interest rate and length of term.
- Loan fees – these are the arrangement fees for setting up and agreeing the loan. If you applied through a broker, they will also require a fee, although sometimes this will be paid for by the loan provider.
The quickest and easiest way to find out how much a loan could cost you is to simply use our loan comparison service, to compare interest rates, fees and fixed-term periods. You can find loans from different providers side-by-side, allowing you to make the right choice for your needs.
How to find the right secured loan for you
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.
- How much you can, and are prepared to, borrow: It’s well worth using our comparison tool to find out how much you could borrow, taking into account the interest rates and monthly repayments, as well as any other loan fees.
- How much your collateral is worth: If you’re using your car or home as collateral, do some research to determine its value, as this will prepare you for conversations with your potential loan provider. You’ll need to arrange an independent review at a later date, on the lender’s behalf, but it’s best to have an idea of what to expect.
- Loan fees: These include arrangement fees, broker fees and, if you later 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. Using our comparison tool, you will be able to get a better understanding of what you could be eligible for, with only a soft credit check which won’t affect your 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:
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.
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.
While you’ll need to undertake a credit check for the loan, you can first start with a soft credit check to determine the likelihood of you being accepted before officially applying. This will prevent you from hurting your credit score by carrying out multiple credit checks.
Above all, it’s important that you’re confident that you’ll be able to meet your repayments. If you have struggled with loans and other debts in the past, you may not want to take the risk of a secured loan, even if it’s more accessible. If you can’t meet your repayments, you risk the loan provider repossessing the collateral you secured the loan with, such as your car or home. This could leave you in a far worse position, so be sure that you fully understand the financial commitment you’re making.
How is my home valued when I take out a secured loan?
Once you have applied with a potential lender, they will arrange for your home to be valued by a chartered surveyor. Once they have secured a valuation from their trusted partner, they will be able to provide a firmer offer for terms of a loan, as well as the amount they are prepared to lend you.
You will normally be expected to pay for any valuations, so keep this in mind when considering your overall costs.
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