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Secured Loans

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Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a loan or any other debt secured on it.

Beginner’s guide to secured loans

What is a secured loan?

If you are a homeowner and need access to a large sum of money, you may be able to get a secured loan.

These loans are ‘secured’ against an asset, usually your home, and may also be called homeowner loans. They can also be secured against other valuable items, such as vehicles or jewellery.

If you fail to keep up with secured loan repayments, the lender has the right to force the sale of your property in order to cover the repayment of your debt.

This means secured loans can give lenders confidence that they will get their money back, but at the same time they can be risky for borrowers as you could lose your home.

Is a secured loan a mortgage?

No, but both secured loans and mortgages are loans that are secured against your property. So failing to repay either of these could result in you losing your home.

A mortgage is designed to help you borrow money to be able to afford to buy a house, while a secured loan is secured against equity in a property you already own and can be used for other purposes, such as paying for home improvements or consolidating debts.

How do secured loans work?

In most cases, you will apply for a secured loan through a broker. Brokers have access to different lenders and can help you to find the right kind of secured loan for your situation.

Once you have a secured loan, it will typically work in a similar way to most other loans. You will borrow a lump sum and then repay it, plus interest and fees, in regular instalments until the debt is cleared.

As long as you make your repayments, the fact your house is being used as collateral shouldn’t be a problem. However, if you fall behind on repayments, the lender could start repossession proceedings on your property to get its money back.

How much can I borrow with a secured loan?

Because lenders are able to repossess your property if you fall behind on payments, minimising some of the risk of lending, you may be able to borrow more than you could with an unsecured loan.

However, the amount you can actually borrow will depend on several factors, including the equity you own in your house. You will only be able to borrow up to the amount of equity you own, and it’s important to remember this isn’t always the total value of your property.

For example, if your house is worth £300,000 and you have an outstanding mortgage of £200,000, you own £100,000 in equity. You will only be able to use this £100,000 as security for a loan, however you may not be able to use all of the remaining equity as security for the loan.

What's the average interest rate on a secured loan?

The interest rates you can get on a secured loan depend on the lender, as well as a range of other factors, including:

  • the amount you want to borrow
  • the value of the asset you’re using as security for the loan
  • the length of the loan term
  • your credit score and overall financial situation.

Secured loan interest rates can sometimes be lower than interest rates on unsecured loans, as the asset acting as security minimises the risk for the lender. As a result, lenders may be more willing to offer a lower interest rate than if you applied for a loan without any kind of security.

What happens if I default on a secured loan?

Defaulting on a secured loan could have serious consequences. If you think you’re going to miss any payments or you’ve already missed one, you should contact the lender immediately to see if you can negotiate a new repayment plan.

If you are struggling with repayments, it may be useful to contact a debt advice charity, such as Citizens Advice or Stepchange, to get some help with your situation.

If you can’t come to an arrangement and you continue to miss payments, the lender is entitled to repossess your property. This is typically a last resort after the lender has tried all other ways to get you to repay the loan.

Bear in mind that missing payments can also affect your credit score.

Is a secured loan right for me?

Only you can know if a secured loan is worth getting. To make a decision, you will need to consider a number of factors, including:

  • how much equity you own
  • your financial situation
  • your credit score
  • how much you need to borrow
  • what you need the loan for
  • how much you can afford to repay each month

If you need to borrow a large sum of money, for home improvements, for example, then a secured loan could be a suitable way to finance this.

However, because your property is put at risk with a secured loan, you should be confident that you can afford to repay the loan in full. If an unsecured loan can meet your requirements, this may be a less risky alternative to go for as your property isn’t directly at risk of repossession.

Weigh up all the potential risks and think about what you can afford to borrow before deciding to apply for any kind of loan.

What do you need to qualify for a secured loan?

To qualify for a secured loan, you will need to own a certain amount of equity in your home or another high-value item. You will also need to meet the criteria of a provider, including any age and income requirements, for example.

Check the criteria set by a lender before applying for a secured loan to see if you are eligible.

How many secured loans can I have?

You may be able to have more than one secured loan on a property, although this will depend on the amount of equity you own in the property and the criteria of individual lenders.

As long as you have sufficient equity in your property and you meet the requirements of a lender, you may be able to take out multiple secured loans. However, any further loans secured against your property could have higher interest rates and stricter eligibility criteria. This is because the lender is taking on a greater risk as, if you default on the loan, they won’t be able to claim any money until the prior lenders have been paid off.

Existing lenders will often need to give their permission before another loan is taken out on the property.

You should bear in mind that just because you could theoretically have more than one secured loan, it doesn’t necessarily mean you should.

Are secured loans easier to get than unsecured loans?

In some ways, secured loans can be easier for an individual to get than an unsecured loan.

The security of the property gives lenders more reassurance that they will be able to get their money back, and so they may be more willing to offer loans to people who may be seen as riskier prospects, such as those with lower credit scores or those who are self-employed and may not have a steady income.

Unsecured loans offer no kind of security and carry more risk to the lender, which means they could be more difficult for borrowers to get.

However, even if you do qualify for a secured loan, it doesn’t mean it’s necessarily the right option for you. Make sure you’ve considered alternative options and, if you choose a secured loan, make sure that you can afford to repay it before applying.

How fast can I get a secured loan?

It is likely to take longer to get a secured loan than an unsecured loan as lenders will need information about the asset you’re providing as security.

To allow lenders to perform all the necessary checks, secured loan applications could take several weeks to process. However, once approved, it often should not take long to receive your funds.

Types of secured loans

The most common type of secured loan is one that is secured against the home you live in. They may also be called homeowner loans or, if you already have a mortgage on your property, second charge mortgages.

However, loans can also be secured against other high-value assets, such as cars and jewellery.

Loans that are secured against a vehicle are known as logbook loans, and they typically come with very high interest rates compared to other options. This type of loan is not available in Scotland.

Secured loans can come with fixed or variable interest rates. With a fixed rate, you will be charged the same rate of interest for the entire term of the loan, which means your repayments should stay the same.

However, with a variable interest rate, the interest you are charged can change during the term of the loan, which means you could be paying more or less than you were at the beginning.

Difference between secured and unsecured loans

Perhaps the most significant difference between secured and unsecured loans is the higher risk that a secured loan poses to a borrower. With a secured loan, you need to put up an asset, such as your home, as security, whereas no collateral is required for an unsecured loan.

The legal implications of providing such an important asset as security means applying for a secured loan can be more complicated and more expensive too. You’ll need to own a home in the first place as well, which isn’t the case with an unsecured loan.

On the other hand, it’s often possible to secure a larger loan with a secured loan, and interest rates tend to be lower than with an unsecured loan, because the lender is taking on less risk and may offer longer repayment periods too. Secured loans may also be easier to obtain than an unsecured loan if you have a less favourable credit history.

Secured loans Unsecured loans
The loan is secured against high-value collateral, such as your house. These loans don’t require any collateral.
You can typically borrow larger amounts over longer periods. Loan amounts are typically smaller and terms are typically shorter than on secured loans.
It may be easier for someone with a poorer credit score to access. Someone with a poor credit score may struggle to access unsecured loans, or they may face higher interest rates if they are accepted.
Interest rates can be lower compared to unsecured loans. Without any security, interest rates can be higher compared to secured loans.

Is it better to get a secured or unsecured loan?

There is no right or wrong answer as to whether you should get a secured or unsecured loan as both have their own pros and cons.

An unsecured loan may be more appropriate if it meets all your requirements and you can afford to repay it. This type of loan is less risky for the borrower as your property isn’t used as security.

However, a secured loan may be an option to consider if you don’t qualify for an unsecured loan, or if you need to borrow more than an unsecured loan can offer. But, with this option, you need to remember that failing to repay the loan could result in you losing your property or another asset you’ve used as security.

» COMPARE: Unsecured loan rates

Pros and cons of secured loans

If you think a secured loan could be right for you, consider the pros and cons before you start applying.

Pros of secured loans

Some of the advantages of a secured loan are:

  • They are often easier for those with poor credit scores to get, compared to unsecured loans.
  • You can typically access large sums.
  • You usually have longer to repay the loan.
  • Interest rates may be lower than for unsecured loans.

Cons of secured loans

However, secured loans come with several disadvantages.

  • You can’t get one unless you are a homeowner or own another high-value asset.
  • You risk losing your home or other assets if you default on payments.
  • They can be a large, long-term financial commitment.

What to consider before applying for a secured loan

Secured loans can be risky, so it’s important to consider a range of different factors to help you work out if it’s the right step for you. Below are some of the key areas to think about.

Financial situation

Perhaps the most important question to ask yourself is whether you can afford to take out a loan. Work out how much you need to borrow and what your repayments would be each month to see if you could realistically afford to take on the loan.

Loan-to-value ratio

The amount you can borrow with a secured loan is linked to the equity you own in your property. Lenders will look at how much your house is worth and how much you owe on your mortgage (if applicable) to see how much equity you own. This will be the amount lenders can recover if you default on the loan, and so will influence how much they will lend.

Interest rate

The interest rate will be one of the main factors which determine how much it costs for you to borrow with a secured loan along with the time frame you borrow the money over. Secured loans can often come with a variable interest rate, which means the rate can go up or down over the term of the loan. As a result, it’s important to make sure you can still afford to make repayments should the rate increase.

Also consider the cost of any arrangement fees the lender may charge.

To help you compare the cost of secured loans, you can look at the annual percentage rate of charge (APRC). This percentage tells you how much a loan could cost over the course of a year, taking into account interest and fees, although you should bear in mind that the rate you receive may be higher or lower than the advertised figure.

Do secured loans affect your credit score?

When you apply for a secured loan, the lender will check your credit history to see how you have managed your finances in the past. This credit check could temporarily affect your score.

If you make your secured loan repayments on time and pay off the loan in full, your credit score could improve. However, this will also depend on how well you manage your other credit responsibilities.

If you miss one or more payments of a secured loan, the lender may report this to credit reference agencies and then it could affect your credit score.

What credit score is needed for a secured loan?

There is no magic number that your credit score needs to be to get a secured loan. Having a higher credit score may improve your chances of approval, but lenders will have different criteria to decide whether to offer you a loan.

Lenders will also consider the value of the asset you put forward as security and your wider financial situation when making their decision.

Having a lower credit score doesn’t necessarily prevent you from accessing a secured loan. In fact, you may find it easier to get a secured loan with a poorer credit score than an unsecured loan, as lenders have the security to fall back on if you fail to make repayments.

Can I get a secured loan with bad credit?

It may be possible to get a secured loan with bad credit, but this will depend on the lender and its individual criteria.

Homeowners with a poor credit score may find it easier to be accepted for a secured loan and access lower interest rates than with an unsecured loan, as the property put forward as collateral minimises the risk for the lender. The lender has the reassurance that it can repossess the property as a last resort should the individual fail to repay the loan in full.

However, just because it may be possible to get a secured loan with bad credit, doesn’t mean it’s necessarily the right option for you. Consider the risks involved and if there are any alternatives that could meet your requirements.

» COMPARE: Secured loans for bad credit

How to find and compare secured loans

If you decide a secured loan is the right option for you, you can begin comparing providers. Many will require borrowers to work through a broker to arrange a secured loan, so you may not be able to apply for one directly with a lender – although a good broker should provide all the information you need to help you make your decision.

While you could choose a secured loan provider based on how much they’ll lend and how long they’ll give you to pay it back, the actual amount you’re offered will depend on your financial situation.

» COMPARE: Secured loan deals

How to apply for a secured loan

If you’ve compared secured loans and you’ve found a suitable option, you may be ready to apply. You will normally need to go through a broker to apply for a secured loan.

Only apply if you are sure it’s the right choice for you and you’ve considered all the possible risks involved.

Also check that you meet all the eligibility criteria set by the lender before applying.

To apply for a secured loan, you will need to provide certain details, including:

  • your name and address
  • your contact details
  • financial information, such as your income
  • information about your property, including its value and how much you own

As with any other loan, lenders will also run a credit check as part of the application process.

They will use this information about your credit history and your finances to help them make a decision on whether to approve your application and, if accepted, what interest rate to offer.

» COMPARE: Secured loans

Alternatives to a secured loan

There are a number of alternatives to secured loans that could be less risky, cheaper, or both, depending upon your situation:

  • Remortgaging: If you require some more cash for home improvements, for example, and you have enough equity in your property, you may be able to borrow extra from your current mortgage lender. Alternatively, you may be able to remortgage on to a cheaper deal that frees up an amount of income each month.
  • Guarantor loan: Rather than using your own property as security, you could find someone to act as a guarantor who promises to repay the loan if you don’t manage to. A guarantor can help to reassure lenders that they will get their money back, so they may be more inclined to lend to people with lower credit scores, for example.
  • Borrowing from family or friends: Although it’s not always easy to ask, family or friends might be happy to lend you some or all of what you need.
  • Credit cards: If you can find a credit card with an interest-free initial period, this could be a cheaper and less risky way to borrow in the short term (as long as you pay off the card before interest starts being charged). However, credit cards won’t suit large, longer-term debt.
  • Personal loans: Personal loans are unsecured, so they might be more difficult to get for larger, longer-term borrowing, but it’s worth considering all types of loan depending on your needs. You’ll need a good credit score to qualify for the best interest rates on an unsecured, personal loan.

How to manage a secured loan

If you have a secured loan, it’s vital to repay it on time, as otherwise you risk losing your property. Create a household budget to ensure you have enough money to make the monthly payments in full and on time.

Bear in mind that if your loan has a variable rate of interest, your monthly payments could change. As a result, you should allow a bit more money in your budget for the repayments, just in case rates rise and your payments increase.

Can I pay off a secured loan early?

If you are in a position to do so, you may be able to pay off a secured loan early. However, you may need to pay an early repayment charge to do this.

You should check the terms of your loan agreement to see how much you can repay early and if the lender will charge any fees for doing so.

FAQs for secured loans in the UK

Is getting a secured loan a good idea?

A secured loan may be a suitable option if you need to borrow a large sum of money over a long period of time and you can’t get it from another source. However, you need to make sure you can afford to make the repayments and you should bear in mind that your property is at risk if you fail to repay the loan.

What is a secured loan?

A secured loan is a type of loan that uses a high-value item, such as a house, as collateral. The collateral acts as security for the lender so, if you default on the loan, the lender can repossess the security to get back the money they are owed.

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