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 that’s calculated as a percentage of what you owe. As long as you 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
- funding for a business
- funding if poor credit means it will be difficult to get a personal loan
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 back the loan. As there’s no collateral to secure the loan, lenders tend to consider an unsecured loan 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 between £1,000 and £25,000, and repayments are spread over a shorter period of time – typically no more than seven years. Interest rates also tend to be higher for unsecured loans. Credit cards are also considered unsecured loans; they're known as revolving credit as you can borrow and repay every month.
Secured loans will allow you to borrow larger sums for longer. They can be easier to get than unsecured loans for people with lower credit scores.
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: you begin on an introductory 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. You can work it out by deducting the amount remaining on your mortgage from the value of your home. Typically, the more equity you have, the more you’ll be able to borrow. You won’t be able to borrow more than the available equity and some lenders will want to lend less than that.
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 will cost.
- The length of the term – if you’re borrowing over a longer period, you’ll be paying more in interest over the term, but your monthly payments may be more affordable.
- 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. Your credit rating may have an impact on the rate of interest you’re offered.
- Loan fees – these are the arrangement fees for setting up and agreeing the loan. If you applied through a broker, you’ll also have to pay them a fee, although sometimes this will be paid by the loan provider. Before you use a broker, check how much their fees will be.
The quickest and easiest way to find out how much a loan could cost you is to use our loan comparison service, to compare interest rates, fees and fixed-term periods. You can find loans from different providers side-by-side, helping you to make the right choice for your needs.
What to consider when looking at secured loans?
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: use 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 off your loan early, potentially 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: in general, 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 will go on your credit report and could temporarily lower your credit score. Use our loan eligibility checker and we’ll run a soft credit check, which won’t affect your score, to find out which loans you could be eligible for.
- Be aware of the advertised APRC. This is usually a representative rate that 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.
Compare the Market Limited acts as a credit broker, not a lender. To apply you must be a UK resident and aged 18 or over. Credit is subject to status and eligibility.Find out if you're eligible for a loan here
Frequently asked questions
What are secured loans often used for?
If you need funds for a major expense and you’re sure you can make the repayments, a secured loan could be an effective way to raise finance. You might use it:
- to buy a new car
- to make home improvements, like an extension or a new kitchen or bathroom
- consolidating debts
You need to give careful consideration to consolidating debts from credit cards, overdrafts or unsecured loans with higher interest rates. This is because you’re converting unsecured credit into secured credit, which introduces the risk of having your property repossessed if you get into increased financial difficulty. Also, using a long-term secured loan to pay off smaller unsecured debts may end up being more expensive once the interest is considered – although your monthly payments may be lower.
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 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. But remember to take into account any penalties and charges you might have to pay if you remortgage, to make sure it makes financial sense. 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.
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. You can compare secured loans here.
Above all, it’s important that you’re confident you’ll be able to meet your repayments. If you’ve struggled with loans and other debts in the past, you may not want to take the risk of a secured loan. 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 – homeless or carless and with a worse credit record – so be sure you fully understand the financial commitment you’re making.
What are the risks of secured loans?
- If you miss repayments, you could lose your home, car or other asset you’ve borrowed against. 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, the rate on your loan 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, until the whole loan’s paid back.
- Arrangement fees and other associated charges can be high.
- Repayment on a short-term fixed-rate loan will switch to the lender’s standard variable rate once the agreed term comes to an end – which is typically higher than the introductory rate. You’ll also end up having to make higher monthly payments if interest rates go up during the remainder of the loan period.
- 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 understand what could happen if you miss a repayment.
If you’re struggling to manage your debts or finances, or just need advice on how to borrow responsibly, both Citizens Advice and the Money Advice Service have a range of information, advice and support.
How is my home valued when I take out a secured loan?
Once you’ve applied for a secured loan, the provider will arrange for your home to be valued by a chartered surveyor. The provider will then be able to provide a firmer offer on the length and amount of the loan.
You’ll normally have to pay for any valuations, so keep this in mind when considering your overall costs.
Is it easier to get a secured loan?
The process of getting a secured loan is a little more complicated than an unsecured loan because your home or the asset used as security needs to be valued.
However, some lenders might be more willing to offer a secured loan to those with a less than perfect credit rating because they have an asset that can be repossessed, then sold to pay off the debt. But you might still have to pay a higher rate of interest than someone with a good credit score.
Can I pay off a secured loan early?
It’s possible, but you’re likely to have to pay an early repayment fee. Some providers are happy to let you overpay up to a set amount every year – typically 10%.
Before you overpay, check with your lender whether an early repayment fee will apply and how much it will be. You’ll need to work out if you’ll save more in the long term by paying off the loan early.
What happens if I default on a secured loan?
If you default on paying your secured loan, the lender has the legal right to take possession of your home or other asset the loan is secured against - provided they follow the correct procedures. This means that they can sell your home or asset to get back the money you owe them.
For most lenders this is the last resort. If you know you’re going to have problems paying your loan, contact your lender and see what help they can offer. Most lenders will set up an arrangement to get back their money, basing the payments on what’s affordable for you, given your personal situation.
But defaults will usually be recorded on your credit report. This, in turn, will lower your credit score and make it harder for you to borrow money and access certain services in the future.
Find out more about how to deal with debt.
How should I manage my secure loan?
To avoid potentially losing your home and damaging your credit score, you should make all your repayments on time and in full. The easiest way to do this is by setting up a direct debit – and this is what most lenders will ask you to do.
As your loan will be a new additional payment, make sure you adapt your budget by cutting back on spending or reducing the money you’re paying on bills. Use our bills calculator to see if you’re paying more than your neighbours.
What happens to the loan if I move home?
If you move home, you’ll usually be expected to pay off any second charge mortgages secured on the property. You’ll then have to decide what to do based on your situation at the time.
If you’ve built up equity in your existing property, you might be able to get a mortgage on your new property without having to take out second loan. For example, imagine you sell your home for £200,000, your outstanding mortgage is £125,000 and you’ve taken out a secured loan for £25,000. You buy a new property costing £250,000. You would have £50,000 in equity and you’d need a mortgage for £200,000 on the new property.
Discuss your options with a mortgage advisor to see what’s affordable in the long term and best for you.
Can I get a secured loan on a car?
It’s possible to take out loans secured against your car. But if you fail to pay back your loan, your car can be repossessed.
There are also car loans known as logbook loans. With these you give your vehicle’s registration document or logbook to the lender until you’ve paid back the loan in full. The most you can borrow will depend on what your car’s worth.
Logbook loans are expensive and potentially risky, so you’re usually better off an unsecured loan or a guarantor loan.
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