Guide to secured loans
- Loans are secured against a property or another asset
- The amount you can borrow, term and interest rate depend on asset equity, credit history and personal circumstances
- Secured loans are typically repaid over five-to-25 years and are for sums over £15,000, but such figures are not definitive
- Rates are likely to be lower than for unsecured loans, but your assets are at more of a risk - consider all the options
Secured loans allow homeowners to borrow a large sum of money, usually at better rates than an unsecured option.
They are sometimes referred to as 'homeowner loans' because most such deals require you to own a chunk of your house in order to qualify.
Note, though, that it is possible to secure a loan against an asset other than a property.
If you have equity in the home that you own and occupy and want to borrow upwards of £15,000 then this kind of borrowing could be right for you.
The amount you borrow, the term and interest rate, all depend upon the equity you have in your property, your credit history and your personal circumstances.
Never take such deals lightly - if you default on your payments you could lose your home.
By securing the loan, you show the lender you can pay them back, even if you struggle to find the money.
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That obviously gives the lender better security and, because of that, you get certain benefits that aren't available to borrowers of unsecured products.
This might be a larger amount of borrowing, a reduced interest rate for your repayments, or even a longer borrowing period.
Secured loans are most commonly repaid over a period of between five and 25 years, although even longer terms may be available.
They're often easier to qualify for than personal loans, because the lender knows it can always get its cash back.
Types of secured loan
Broadly speaking, there are three types of secured loans to choose from:
Short-term fixed rate secured loans
With this sort of product you pay a fixed amount every month throughout the short term of the fixed rate (usually between one and five years).
Your repayments will then revert to the lender's standard variable rate, meaning that your payments could go up or down.
Fixed for term secured loans
With fixed-for-term deals you pay a fixed amount every month throughout the term of the deal, giving you peace of mind that your repayments will not fluctuate, and the ability to budget your outgoings.
Variable rate secured loans
With variable rate loans the interest you pay may fluctuate depending on the Bank of England base rate or market forces.
This means that your monthly repayments and the total amount you repay over the term could increase or decrease. If interest rates go up you could repay a lot more than you originally budgeted for or, in the worst-case scenario, be unable to meet your repayments.
Other things to look out for with secured loans
Low advertised rates
Did you know...?
- Gocompare.com's loans service helps you see both secured and unsecured loans in our best-buy table to check how much you could borrow and at what rate
Beware of headline rates - by law these rates only need to be given to 51% of successful applicants.
So, 49% of successful applicants are likely to pay a different, more expensive rate, and others are likely to be turned down with a mark placed on credit records held about them.
Many products have strict eligibility terms such as age (usually you must be 21-65) and residency.
In most cases you must have been a UK resident for at least three years, have a current account and have a regular income.
Early repayment fees
This fee can vary, but it's typically the equivalent of one or two months' interest, depending on how much notice you give.
Availability of funds
Lenders may charge a fee for same-day transfers. With normal transfers (usually two-to-three working days) you can usually avoid this fee.
Check the terms and conditions thoroughly for other fees, such as arrangement fees.
Payment breaks/deferment periods
Some lenders offer 'payment holidays'. While these can be beneficial if finances are tight, bear in mind that interest will continue to be charged, meaning that the total amount you repay will increase.
What are secured loans usually used for?
Did you know...?
- Our smart search tool allows you to see just the deals you're likely to qualify for, giving you a better idea of the actual rates available to you without impacting on credit files
You might decide that you want to add value to the property itself, perhaps by building an extension or conservatory.
Other borrowers may plan to cut the cost of existing, expensive credit card debt and smaller personal loans by repaying them all with a low-cost secured loan.
This also means they only have one monthly payment, making their debt simpler to manage and budget for.
What's the difference between a secured and unsecured loan?
This is almost always your house, but in some rare occasions it could be other property, such as a car.
An unsecured debt - often known as a personal loan - represents more risk for the lender because they might not get their money back if you start missing repayments.
Because of that, they'll usually have a lower maximum value and charge a higher interest rate.
Gocompare.com's loans service helps you see both secured and unsecured loans in our best-buy table to check how much you could borrow and at what rate.
What's more, our smart search tool allows you to see just the deals you're likely to qualify for, giving you a better idea of the actual rates available to you.
This soft search won't leave a footprint on credit reports, which is important because too many applications and/or rejected applications can have a negative impact on credit scores, affecting your ability to secure attractive deals.
- Consider the pros and cons of remortgaging before opting for a secured loan
Alternatives to secured loans
The obvious alternative is an unsecured loan, although these are usually only available for smaller amounts of borrowing.
If you're looking to borrow a small amount, it's worth weighing up the pros and cons of 0% credit cards, low APR cards and agreed overdrafts as alternatives, while peer-to-peer lending options are certainly worth exploring.
Large loans: Remortgage or take a secured loan?
If you're thinking of securing a large debt against your property, you should certainly think about the possibility of remortgaging as an alternative.
A mortgage can be thought of as the ultimate secured loan and it may make sense to consolidate your debt in such a product rather than taking out an additional loan.
Note that you'll need to have enough equity in your home to release some money and still qualify for another mortgage.
Also look out for high upfront fees and remember that extending the term of a mortgage means paying interest for longer, increasing the overall cost of debt.
As ever, shop around, look at your options and do the maths to decide the right deal for you.
Secured loan protection
While a secured product will almost certainly reduce the cost of your debt, you need to think carefully before taking one out.
Securing a debt against your property means that your home is at risk if you don't keep up with your repayments, so you need to be completely sure you can manage the debt.
If you have any doubts about your ability to make repayments then this option is not for you, even for debt consolidation. Instead, it might be time to consider seeking advice on getting out of debt from an organisation such as the Citizens Advice Bureau.†
However, if you simply want extra security for your repayments, then it's worth considering an insurance policy to protect your secured loan.
With the right policy your repayments will be covered in the event of you becoming ill or injured and unable to work, or if you were to be made redundant.
By Felicity Hannah