Secured loans

If you own an asset, such as a house or car, secured loans are one way that you may be able to borrow money. They’re a common option for people who need a larger loan,a long loan term (e.g. over five years), or who are having trouble getting approved for a personal loan. But secured loans carry the risk of losing your assets, so it’s important to know the facts before committing to one.

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What is a secured loan?

Secured loans – also known as homeowner loans, home loans or second-charge mortgages – allow you to borrow money while using your home as ‘security’ (also called ‘collateral’). This means the lender can sell your property if you aren’t keeping up with repayments, as a way of getting their money back.

How does a secured loan work?

As with other types of loans, you’ll make set monthly repayments to pay back what you owe, plus any interest. The interest rate is calculated as a percentage of the amount you owe – it may be fixed or variable depending on the loan you’ve chosen. As long as you make the monthly repayments on time and in full, you won’t lose your home.

What happens if I default on a secured loan?

If you default on a secured loan, the lender has the legal right to take possession of your home. This means they can forcibly sell it to regain the money you owe them. However, you may be able to negotiate an agreement with the lender by contacting them as soon as you realise you’re struggling to meet your payments.

A default will usually be recorded on your credit report, which 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 dealing with defaults.

What’s the difference between a secured and unsecured loan?

An unsecured loan (or a personal loan) isn’t attached to your home or any other asset. Because there’s no collateral for lenders to claim if you can’t repay them, unsecured loans are typically considered higher risk for lenders. So you generally need to have a good credit score to be approved for one, as this reassures lenders that you’re likely to pay them back. You can get an idea of how lenders may see you by checking your free Experian Credit Score.

Just as with a secured loan, when you take out an unsecured loan you’ll agree to certain terms for repayment, including an interest rate and how long you’ll have to pay back the debt. Credit cards are another type of unsecured credit – they’re also known as revolving credit, meaning you borrow and repay money each month.

What are the advantages of secured loans?

  • You may be able to take out larger amounts. It can be difficult to borrow more than £25,000 with a personal loan, but secured loans often go up to £100,000 or higher. For example, this may be useful for big home improvement projects or extensive education costs.
  • You can stretch the loan out for a longer period, making your monthly payments more affordable. Personal loans usually last for a maximum of seven years, making it more difficult to afford the monthly payments on large loan.
  • Secured loans are usually easier to get approved for if you have poor credit or no credit history. This is because using your property as collateral lowers risk for the lender.

What are the disadvantages of secured loans?

  • It comes with significant risk – if you default on your payments, the lender can repossess your home to recover the debt. So, while it’s called a secured loan, it’s the lender rather than you who gets the security.
  • Getting a secured loan so that you have more time to pay back the debt may give you lower monthly repayments, but you’re likely to pay more interest overall. This is because interest will be charged monthly – so the more months you have the loan for, the more interest payments you’ll make.
  • If you want to pay off your loan faster than originally agreed, you may be hit with early repayment fees.

Can I pay off a secured loan early?

There are a few reasons why people’s situations change and they’re in a position to pay their loans off early, but with secured loans (assuming they’re secured against your home), if you move house you’ll usually be expected to pay it off at that point too.

Most secured loans where you can pay off early, you’ll likely have to pay a fee – which is usually around the cost of a 1-3 month’s interest. Check with your lender and they should be able to easily calculate the fee, which will depend on the amount you still owe.

Are secured loans easier to get?

Generally speaking, yes. Because you’re usually putting your home as a guarantee for payments, the lender will see you as less of a risk, and they’ll rely less on your credit history and credit score to make the judgement.

So, secured loans might be particularly appealing if you’ve been refused for other kinds of credit, and you’re a homeowner, as you’ll be more likely to be accepted.

What should I consider before applying for a secured loan?

Secured loans come with considerable risk, so they’re not to be taken out lightly. Here are some of the things you should think about before applying for a secured loan:

Your financial ability

Think carefully about what you can afford to repay, and whether you really need whatever it is you’re taking out a loan for. Take a good look at your finances and think about future expenses too, such as starting a family or buying a home. You need to be confident that you can make every monthly repayment on time and in full, throughout the entire loan term, even if your financial or lifestyle situation changes.

Your loan-to-value ratio

When you apply for a secured loan, the lender will look at how much equity you have in your property. This is essentially the difference between how much your home is worth and how much you still owe on the mortgage. This information gives the lender an idea of how much money they could recover from selling your home if you can’t repay them. Typically, the more equity you have, the more you’ll be able to borrow.

Interest rates

Most secured loans have a variable rate, and you should factor in the possibility of rate rises when you're working out what you can afford. It’s also useful to use APRC to compare secured loans – this is the interest rate plus any mandatory fees, so it can give you a better idea of the full cost of the loan. But remember that the advertised rate isn’t necessarily what you’ll get. The rate you’re offered may depend on how much you want to borrow, how long for, your credit score, and the value of your collateral.

How can I find a secured loan?

If you're planning to apply for a secured loan, it's important to shop around and find the best deal possible for you. Comparing loans with Experian before you apply will leave a soft search on your credit report that isn’t visible to lenders, so your score won’t be affected unless you actually apply.

How should I manage my secured loan?

It’s crucial to make all payments on time and in full, to avoid losing your home and damaging your credit score. Consider setting up a direct debit so you never forget to make a payment, and stick to a budget so you always have enough to cover them.

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