What is Security on a Loan?
Providing security for a loan means you put forward an asset, such as your home, as collateral against the finance that you need. As lenders feel they are taking on less risk with loan security in place, secured loans often have lower interest rates than loans with no security attached.
If you can provide security for a loan, you might find it easier and less expensive to borrow than if you can’t. So what will lenders accept as security on a loan, and what are the other pros – and cons – of providing security on a loan?
What is meant by security on a loan?
In relation to loans, security is an asset that a borrower promises to a lender if a loan goes unpaid. Putting an asset forward as security in this way can often make it easier to get accepted for a loan. The interest rates on these secured loans are also usually lower than on loans taken out without providing security, which are known as unsecured loans.
This is because having security against a loan reassures lenders that there is less risk of them losing out financially if the loan isn’t paid back. Security on a loan is sometimes also referred to as collateral.
» MORE: What is a secured loan?
What can be used as loan security?
Your home, vehicle or another asset of value, such as jewellery, could all possibly be used as security against a loan.
Property is the asset that is most commonly used as loan security, with a mortgage the most obvious example of bricks and mortar being used as collateral to borrow.
You might also be able to use the equity that you own in a property as security for a homeowner loan – these are sometimes referred to as second charge mortgages. Your home could also potentially be used as collateral on a debt consolidation loan, or a first charge mortgage, which is a loan you take when you have no outstanding mortgage. Property also acts as security for a bridging loan.
Aside from property, some forms of car finance, such as hire purchase, allow you to use the vehicle that you’re buying as security against the loan you take. While usually an expensive way to borrow it might also be possible to use your car to secure a logbook loan.
Alternatively, if you visit a pawnbroker, you may be able to put forward items of value, such as jewellery or an antique, as security against a loan. Again, however, this can be a relatively expensive form of borrowing.
» COMPARE: Secured loans
What about security for business loans?
For businesses that need to borrow, there is usually a much wider range of assets that lenders will accept as security for a loan.
These tend to include so-called hard or tangible assets owned by the business, such as property, machinery, equipment, vehicles, stock or money owed to the business. And they might also include what are known as soft or intangible assets, such as licences, trademarks, patents, copyrights and intellectual property.
If you’re a business owner, lenders might also be willing to consider your own personal assets, such as your home or car, as part of security for a business loan.
» COMPARE: Secured business loans
Advantages of providing security on a loan
There are a number of potential benefits of providing security for a loan, including:
- Lower interest rates: Secured loans tend to be less expensive relative to unsecured loans because of the safety net the collateral provides the lender against non-payment, and the reduced risk that they could lose out financially.
- Potential to borrow more: Lenders can be more willing to offer larger loans if you have collateral to put against it.
- Improves your chances of getting a loan: Again, knowing the security is there to fall back on means lenders might be more willing to lend to you should they have any doubts about your ability to repay the loan, perhaps due to bad credit.
» COMPARE: Bad credit secured loans
Potential drawbacks of having security for a loan
On the other hand, there are some potential downsides to putting up security on a loan, including:
- The risk of losing your home: If you fail to keep up with your loan repayments, your lender could take your home or any other asset you’ve put forward as security.
- You could end up paying more interest: Secured loans often have longer repayment terms than unsecured loans taken out without security. So while your monthly repayments might be lower, you could be paying interest for longer, increasing the total cost of the loan overall.
- Longer to arrange: The additional legalities involved with taking out a loan secured by an asset means it’s likely to take longer to arrange than an unsecured loan.
- Higher charges: The legal checks and arrangements necessary also come at an additional cost, usually leading to higher charges overall.
- Early repayment charges: Many loans arranged on a secured basis include early repayment charges, which are payable if you want to pay back and end your loan earlier than was agreed.
What if you don’t have security for a loan?
If you need to borrow, but can’t or don’t want to provide security in order to get a loan, you might want to consider an unsecured loan.
These loans don’t require collateral, so your home or any other asset you might put forward with a secured loan won’t be directly at risk if you fail to keep up with your repayments. Whether you’re eligible for an unsecured loan largely depends on your credit score and financial situation. Keep in mind that interest rates on loans that are unsecured tend to be higher to reflect the greater risk being taken on by lenders.
» COMPARE: Unsecured loans
WARNING: 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.
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Tim draws on 20 years’ experience at Moneyfacts, Virgin Money and Future to pen articles that always put consumers’ interests first. He has particular expertise in mortgages, pensions and savings. Read more