What is a Secured Loan? And is it the Right Option for Me?

A secured loan is a type of personal loan, where the lender secures the value of the loan against an asset owned by the borrower. A secured loan could be an option if you need to borrow a large amount or have been turned down for other finance. Read on to find out if a secured loan is right for you.

John Ellmore 12 November 2020

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You might be looking for a loan to buy pricey items that you cannot afford or to pay off debt. A loan can be a useful way to improve your financial situation, but all loans come with risks and secured loans have particular risks that you should familiarise yourself with before you think about borrowing in this way.

What is a secured loan?

A secured loan allows you to borrow larger sums, but to mitigate the lender’s risk that you can’t meet repayments, an asset of yours of equivalent value will be used as collateral.

This means if you can’t meet repayments, the lender can repossess the asset, transferring deeds of ownership to themselves in order to sell the item to raise all or part of the funds they are owed.

What are the different types of secured loan?

There are several types of assets which are used as security for secured loans. The most popular form of secured lending is against property.

Another common form of secured lending is some types of car finance, using the vehicle as security until the loan is cleared.

There also some lesser known assets that can be used as collateral for some secured loans, these are a few:

Collateral typically comprises one of the following:

  • Financial investments
  • Life Insurance
  • Precious metals

In this guide we will focus on secured lending against property.

Why might you choose a secured loan?

Secured loans may be taken out to pay off debt. Whether credit card debt or debt accrued through other loans, taking out a secured loan could help you consolidate more expensive debt which is racking up interest.

Because secured loans typically have lower interest rates than unsecured loans this can be a viable strategy to pay off large amounts of debt.

However, when consolidating debt you should be aware that increasing the loan amount or extending the loan term can cost you more in the long term.

Pros and cons of a secured loan

As secured loans are such a big financial commitment, it is important to know the potential benefits and drawbacks of acquiring this type of loan.

Pros Cons
  • Approval can be higher than other forms of loan
  • You can borrow larger amounts than unsecured loans - and benefit from longer repayment terms
  • Can be easier to access for individuals with bad credit
  • Interest rates can be lower than unsecured loans
  • Risk of losing the collateral which secured the loan
  • When used to transfer debt, borrowers can transfer unsecured debt into secured debt
  • Long term financial commitment
  • May only be sought from a broker

What documents do I need when applying for a secured loan?

When applying for secured lending from a broker you need a form of identity, usually you can apply with a driver’s licence or a passport. A utility bill is often used to prove your address. However this will just be the start, lenders in the secured loans market are obliged to carry out an extensive application process, which looks at your financial history, your current financial standing and the likelihood of your ability to comfortably repay the debt.

If applying online, lenders nowadays will often confirm your identity using a credit agency. Thankfully this will not affect your credit rating as it is deemed a soft credit check. Find out the difference between hard and soft credit checks in our comprehensive guide.

Can I transfer debt to a secured loan?

It’s possible to take out a secured loan to pay off multiple loans which you’re struggling to manage. An increasing number of people are remortgaging their homes or considering secured lending against the equity in their homes in order to free up money to buy expensive items or to pay off credit card debt or existing unsecured loans.

When evaluating whether to take on secured lending the borrower should be aware of the risks of increasing their overall debt, or losing their home, if they can’t keep up with repayments.

It’s obviously a tempting proposition. It’s easy to think that by transferring high interest debt to a secured loan that you’re taking the pressure off yourself. You might think that future debt repayments will be smaller, due to the lower interest rates on secured loans.

But benefits aside, when you transfer unsecured debt to a secured loan, you’re increasing the total amount you’ll have to pay off before your collateral is safely back in your hands. This could mean you’re more likely to lose your house or other possessions should you default.

Alternatively, those with debt from other personal loans might consider paying off unsecured debt as quickly as possible to minimise the interest they will have to pay. Then you can focus on comfortably paying off your secured loan over a number of years to a schedule that suits you.

Methods to manage debt

Where possible, avoid acquiring new debt when you already owe money to a lender. Instead, stick to the repayment schedule agreed with your lender to pay back debt as quickly as is practicable.

To do this, pay at least the minimum repayment on any debts to avoid falling further behind. Pay other bills on time each month, to ensure your debt doesn’t expand further.

Always work out which debts to pay off first. This is especially important for those with multiple debts because some debts have more serious non-repayment consequences than others.

The Money Advice Service lists the following as priority debts:

  • Court fines
  • Council tax
  • TV licence
  • Child maintenance
  • Gas and electricity bills
  • Income tax, national insurance & VAT
  • Mortgages, personal loans and loans secured against your home
  • Hire purchase agreements
  • Missed DWP and HMRC payments

Is a secured loan a good idea for me?

Whether a secured loan is a good option for you right now depends on a number of different things.

Look at the total cost of the loan over its term. You can get a clearer picture of this by examining the loan’s annual percentage rate, interest rate, fees and other charges.

Make sure you know the loan term before taking out a loan, so you know how long you’ll be expected to commit to. Comparing different loan lengths is a good way of deciding which loan is right for you, because you’ll know the timescale of when you’ll pay the loan off, and you can check if it tallies with your life plans.

Will you be able to get the loan amount you are looking for? If not, would you consider a smaller amount in the form of an unsecured loan?

It’s also vital that you understand the lending criteria of the secured loan you are considering. Each lender has different requirements for accepting secured loan applicants. To make sure you are eligible for a loan, you could engage a broker who will track down suitable loans on your behalf.

You should explore all possible credit options and do plenty of research before applying for a loan, otherwise you risk being rejected and damaging your credit score.

Compare secured loans

Compare secured loans now to find the best secured loan for your financial circumstances and personal requirements. We offer unbiased comparison tables so you can get a clear view of the differences between lenders’ secured loan products.

When thinking of taking out a secured loan, always remember that what you use as collateral to secure the loan can be repossessed if you cannot meet repayment deadlines.

If you are confident you can keep up with a repayment schedule, make sure to compare loans and interest rates to get the best idea of the true cost of a loan.

About the author:

John Ellmore is a director of NerdWallet UK and is a company spokesperson for consumer finance issues. John is committed to providing clear, accurate and transparent financial information. Read more

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