Secured Loans

If you own a house or have something else valuable, you might get a cheaper loan by using it as a guarantee.

What is a secured loan?

A secured loan is when you borrow money and promise something valuable you own as a guarantee. Usually, this is your house or other property, making these loans often called ‘homeowner loans’ or ‘second-charge mortgages’.

If you can’t pay back a secured loan, the bank or lender can take the thing you used as a guarantee. If it was your house, they can sell it to get their money back. That’s why you should think carefully before using your house to back up a loan. If you decide to do it, make sure you have a solid plan to pay back the money so you don’t miss any payments.

How do secured loans work?

With secured loans, you borrow money based on your property’s value. How much you can borrow mainly depends on how much your home is worth beyond any loans you already owe on it (this is called equity) and if you can afford to pay back the loan.

Interest rates for secured loans are often lower than for unsecured loans because having something valuable as a guarantee makes the lender less likely to lose money. This also means you can usually borrow more money than with an unsecured loan. Depending on your home’s worth, you might be able to borrow from £1,000 to £2.5 million or even more.

Is a secured loan right for me?

You should think about your money situation and why you need to borrow money before you consider a secured loan. While they let you borrow more, they’re also riskier because you could lose your home or whatever you used as a guarantee if you can’t make the repayments.

But, they’re a good choice if you need a lot of money, have something valuable like a property to use as a guarantee, and are sure you can handle the monthly repayments.

What can be used as security?

For secured loans, the guarantee is usually your property, like where you live or another property you own. Some lenders might let you use other valuable things as a guarantee, like another piece of property or jewelry, but houses are the most common guarantee for these loans.

Car loans are also secured loans, but you can usually only use the car you’re buying as the guarantee.

How to choose the best secured loan

Comparing secured loans is key to finding the best terms and rates. When looking at different secured loans, you should think about several things to make sure you’re choosing wisely:

1) Repayments

Check if the monthly payments are easy for you to handle with your budget. Not being able to pay can lead to the risk of losing your property.

2) Interest rates

The interest rate is a big deal because it affects how much the loan will cost you in the end. Lower rates mean the loan is more affordable over time.

3) Length of loan

How long you take the loan out for will change how much you pay each month and how much interest you pay altogether. Loans that last longer can have smaller monthly payments but you might end up paying more in interest.

4) Risks

It’s very important to understand the risks with secured loans. If you can’t make the payments, you could lose your property. Make sure you’re confident you can keep up with the payments before you decide on a loan.

Pros and cons

Pros

• Lower interest rates: Since lenders have collateral with secured loans, they usually offer lower interest rates than unsecured loans. This reduces the cost over the life of the loan.
• Access to higher amounts: Secured loans can provide larger amounts of money, useful for big projects like home renovations or paying off multiple debts.
• Flexible use: Borrowers can use the funds from secured loans for various purposes, including home upgrades, education, or starting a new business.
• Longer repayment period: With longer terms available, secured loans can make monthly payments more manageable, easing financial pressure.
• Approval for those with lower credit scores: The presence of collateral makes secured loans more accessible to individuals with less-than-perfect credit histories.
• Improved credit: Paying off a secured loan successfully can boost your credit score, potentially making it easier to borrow in the future.

Cons

• Risk of asset repossession: The most concerning downside is the potential loss of your collateral (usually your home) if you can’t keep up with payments, leading to significant financial loss.
• Lengthy application process: The process for secured loans can be complex, involving property assessments, title checks, and legal paperwork, making it more time-consuming.
• Costly additional charges: Be aware of extra fees that may come with secured loans, such as arrangement fees, valuation fees, or penalties for early repayment. It’s crucial to understand all the costs involved.
• Tied to property value: The amount you can borrow is often linked to your property’s value. A drop in property values could limit your borrowing capacity.
• Long-term commitment: With longer repayment terms, you’re committing to payments for an extended time, which may limit your financial flexibility in the future.
• Potential overborrowing: The ability to borrow large amounts might lead to borrowing more than you can comfortably repay, resulting in a deeper debt situation.

How much do secured loans cost?

The cost of secured loans can vary widely, influenced by a range of factors. Here are some key elements that impact the cost of secured loans:

• Interest rate: This is a major element affecting the loan’s expense. Rates differ across lenders and might be fixed or variable. Both your credit standing and the loan-to-value ratio (LTV) of the collateral influence the rate you get.
• Loan amount: The sum borrowed directly impacts the loan’s total cost, with larger loans usually incurring more interest over their duration.
• Loan term: The loan’s duration can alter its cost. Loans with longer terms often have smaller monthly payments but can lead to higher total interest charges.
• Credit score: Your credit score is vital in determining your interest rate. Those with better credit scores tend to receive lower rates.
• Loan-to-Value Ratio (LTV): The LTV ratio indicates the borrowed amount’s percentage against the property’s value. Lower LTV ratios often mean lower interest rates, reflecting lower risk for the lender.
• Lender fees: Various fees, including arrangement, valuation, and legal fees, may be charged by lenders, increasing the loan’s overall cost.

How does the application process work?

The process for applying for secured loans generally includes the following steps:

• Researching and Comparing Lenders: Start by looking at different lenders to find the best rates and terms that suit your needs. Consider interest rates, loan terms, and any fees associated with the loan.
• Gathering Necessary Documents: You’ll need to provide documentation that verifies your income and ownership of the property you’re using as collateral. Common documents include pay stubs, tax returns, and property deeds.
• Applying Online or In-Person: Depending on the lender, you can apply for a secured loan online or by visiting a physical branch. Each method will require you to fill out an application form with your personal and financial information.
• Lender Reviews Your Application and Performs a Credit Check: After receiving your application, the lender will review your financial history and perform a credit check to assess your creditworthiness.
• Valuation of Your Property: The lender will conduct an appraisal of the property you’re offering as collateral to determine its current market value. This helps the lender establish the loan-to-value ratio, which is critical in determining the loan amount and interest rate.
• If Approved, Funds Are Disbursed: If your application is successful, the lender will offer you the loan. Once you agree to the terms and complete any required paperwork, the funds will be transferred to you.

Alternatives to secured loans

If the idea of securing a loan against your property makes you uneasy, here are some other options you might want to explore:

• Unsecured Loans: Unlike secured loans, these don’t require you to put up any collateral, such as your home. The trade-off is that they often come with higher interest rates due to the increased risk for the lender. Additionally, there might be a cap on how much you can borrow compared to secured loans.
• Personal Line of Credit: This is a flexible loan option where you’re approved for a specific credit limit. You can withdraw funds up to this limit as needed, making it a convenient choice for ongoing expenses. Interest is typically only charged on the amount you draw, not on the entire credit limit.
• Credit Cards: For smaller borrowing needs, credit cards can be a practical option. They offer the flexibility of borrowing up to a predetermined credit limit. However, be mindful of their usually higher interest rates, which can make them a costly choice if you’re unable to pay off the balance quickly.

FAQs

Can I mix a secured and unsecured loan together?

No, if you want both, you’ll have to apply for two different loans.

Which loan is easier to get?

Applying for an unsecured loan is usually faster. This is because the lender doesn’t have to spend time checking the value of your collateral.

Can I take out a secured or unsecured loan with someone else?

Yes, both types of loans can be taken out jointly. If you’re getting a secured loan with someone else, they also need to own whatever you’re using as security.

Will a secured loan affect my credit score?

Just like unsecured loans, secured loans appear on your credit report.

If you pay the loan back on time, either type of loan can help boost your credit score. But if you miss payments or default, your credit score will take a hit.