Secured loans are a type of loan that provide a form of security to the lender – often, a home or another valuable personal asset. In effect, a secured loan is a personal loan with collateral.
The amount you can borrow is linked to your personal circumstances and the value of the asset that you put forward as security – but this type of loan is often the best option if you’re looking to borrow a particularly large sum of money over a prolonged period.
There are several different types of secured loan out there, each becoming increasingly popular options due to the fact that they give applicants access to lower repayment rates versus unsecured loans.
What kinds of secured loans are available?
‘Secured loans’ is an umbrella term that covers all the following options:
- Home equity or homeowner loans
- Second mortgages or second charge mortgages
- First charge mortgages
- Debt consolidation loans (though it’s worth noting that these aren’t always secured)
While the maximum amount you’re likely to get from an unsecured loan is around £25,000, many banks and building societies are willing to lend up to £100,000 through a secured loan. These can come in a variety of fixed rate and variable rate contracts, so it’s always worth shopping around to find a lender best suited to your needs and circumstances.
How do you find the best deal?
If you have a mortgage, the best place to start is by discussing what your options are with your existing lender. If you have a glowing track record when it comes to making timely mortgage payments, you’re likely to be eligible for more favourable secured loan rates.
If this doesn’t come to fruition or you don’t have an existing mortgage lender, consider checking comparison websites to see if you’re able to find a better deal with other secured loan lenders. You should, of course, be aware that some sites may not show a comprehensive selection of the deals available – so make sure to do your own thorough research into secured loan interest rates, the associated terms and conditions, and what could happen if you don’t repay on time. Don’t forget about those pesky hidden costs, too – any arrangement fees should be included in the APRC (Annual Percentage Rate of Charge), so use this as your comparison rate.
Always check to see if your deal comparisons will show up on your credit report, as certain lenders will carry out a full credit check on you before providing a quote. If you do this a number of times, it can harm your credit rating. A recommended alternative is to ask for a ‘quotation search’ instead, which won’t be visible on your credit report.
For a better understanding of how much a secured loan can cost, let’s take a look at an example:
Mark has secured his property against a loan of £40,000 at a fixed rate APR of 7.7% over a repayment window of 5 years. This means he’ll repay a total of £48,024, split into even monthly costs of £800.40.
Is a secured loan right for you?
Secured loans can be spent on just about anything, but usually it’s for the greater expenses that life throws your way. As with any type of loan, it’s vital for you to fully consider both the advantages and disadvantages.
The advantages of a secured loan:
- They tend to come with lower interest rates, as the loan is secured against an asset
- Repayments are typically made on a monthly basis across a long borrowing period of a maximum of 30 years
- You can borrow a larger amount than is typically available with an unsecured loan – the added security leaves lenders willing to let you borrow more
The disadvantages of a secured loan:
- If you can’t keep up with the repayments, your lender has a legal right to repossess your home and assets, leaving the borrower very vulnerable
- Some secured loan interest rates are variable, meaning that the repayments could increase over the course of your repayment term. Make sure you double-check prior to applying, so that you know with certainty whether the rate is fixed or variable
- There are certain charges that may be applicable if you apply for a secured loan – such as expensive arrangement fees and setup costs. It’s important to be fully aware of these charges before proceeding to avoid any costly surprises further down the line
How to apply
When applying for a secured loan, there are a variety of factors to consider:
- Your income – A loan provider will want sufficient evidence to prove you can make repayments, looking at the strength and consistency of your income. Though it’s possible to obtain a secured loan while self-employed, this aspect of the application process typically favours the employed
- Your amount of ‘free equity’ – If you have an existing mortgage, your lender will want to see that you have enough remaining equity that hasn’t been borrowed against
- Your credit score – Secured loan providers will likely look at your credit report to obtain a better understanding of how well you manage your debts – the better your credit score, the more likely you are to be accepted. That’s not to say you won’t be accepted with a bad credit history – lenders tend to be more lenient with secured loans, due to loans being secured as assets such as property. Secured loans for bad credit holders are out there – and for more information on the challenges and caveats associated with finding finance with a poor credit history, you can read our dedicated page before making your decision
Factors vary from lender to lender, but it’s always best to have this fundamental information at hand when applying. Though the malpractice of insurance providers has given PPI a bad name in recent years, exploring your payment protection insurance options is always a good idea when applying for a secured loan – as this will give you a blanket of security, should your personal circumstances change. For example, if you were off work sick and subsequently unable to make your monthly repayments, your insurance provider would step in and pay them for you, thus avoiding any drastic measures, such as house repossession.
Because of the risky nature of securing a loan against an asset, it’s vital to work out a strict repayment plan and a thoroughly considered budget, accurately managing your incomes and outgoings. If you aren’t confident in being able to repay a larger amount of money, there are smaller alternatives available that might be better suited to your financial situation.
To explore the personal finance landscape and the different types of loan available to UK applicants, head straight to our our blog. If you find yourself unable to cope with financial pressures, remember that help is available – check out the Citizens Advice website here or call the free national debt helpline at 0808 808 4000.