Secured loans can be a useful way for property owners to borrow money by using their home as collateral. These loans offer several benefits over unsecured loans, including lower interest rates, longer repayment periods, and the ability to borrow larger amounts.
However, it’s important to understand the risks involved. If you’re unable to make your monthly repayments on time, you could be at risk of losing your home. It’s crucial to carefully consider the potential consequences before applying for a secured loan.
In addition to the benefits and risks, they can also be used for debt consolidation, home improvements, and other expenses. They may offer lower interest rates compared to credit cards or unsecured loans, making them an attractive option for those with bad credit scores.
It’s important to understand the jargon and fees associated with this type of finance and to compare lenders before accepting an offer. You should also consider the overall cost of the loan, including any insurance or fees, to ensure you can afford the monthly repayments. Before applying, it’s important to check your credit report and improve your credit score if possible.
Furthermore, this type of lending is not the only option available to homeowners. Remortgages, homeowner loans, and equity release are other alternatives that may be more suitable for some borrowers. Read our guide to find out everything you will need to know about secured loans.
What we cover in this article:
What is a secured loan?
Secured loans are often referred to as homeowner loans, or second charge mortgages. A secured loan is a type of borrowing that allows you to use your property as security, meaning that if you default on your payments, your lender has the right to repossess your home to recover the money you owe.
This is the key difference between secured and unsecured loans, such as personal loans or credit cards. To qualify for a secured loan, you must be a homeowner with enough equity in your property to meet the lender’s loan-to-value requirements.
Your credit score, credit history and income will also be considered when determining whether you are eligible for the loan and what interest rate you will be offered.
Once you have been approved, you will receive the money as a lump sum, which you will then need to repay in monthly instalments over a fixed term. The interest rate on secured loans is typically lower than on unsecured finance because the lender has the security of your property to offset the risk of default.
They are only available to homeowners and usually allow borrowing from £10,000 to £500,000.
We offer products from a wide panel of lenders and whatever your circumstances, we always look to secure you the best possible deal. On top of finding you the best deal, our low broker fee will help you save even more money.
How does a secured loan work?
Secured loans work by allowing you to take out a loan secured against property, which is the main difference between a secured and unsecured loan (also known as a personal loan).
To get one, you must own a property and have sufficient equity in it to fit your chosen lenders loan to value ratio requirements.
Once you have a secured loan, it works much like a personal loan or mortgage, as they are repaid through monthly payments each month.
What you should consider when taking out a secured loan
There are a number is things to consider before taking out a secured loan. They are: –
- Which sort of interest rate you are looking to take – this is a major point as secured loan interest rates can vary by significant amounts. Understanding the difference between fixed and variable interest rates is important before signing up for a product. When working out your available budget, consider whether you could afford interest rate rises as this will impact your future repayments. If not, you may want to consider a fixed rate, even if you must pay a small premium for it.
- How long are you looking to borrow the money for? Some loans have early repayment charges should you pay off a secured loan early. This means that to repay the loan before the end of its term, you must pay an additional charge or ‘penalty’. If you’re looking to repay the loan within the first few years of taking it out, consider looking only at loans with no early repayment charges, or take a shorter loan term.
- Finally, and potentially most importantly, are the loan repayments affordable? The consequences of failing to keep up the monthly repayments can be severe. As the loan is secured on your home, it is vital that you only consider borrowing money that you are confident that you can afford the repayments on, both now and in the future. Failure to do so will increase the risk of losing your home as it is used as collateral and will affect your credit score.
Securing the best interest rate, cost and fees for your loan
There are thousands of products out there and the difference between them can be significant. When looking to take out a new homeowner loan, it’s important that you find the best deal, as the cost of choosing poorly can amount to thousands. As such, you should always compare offers from multiple sources before committing.
Use a secured loan broker such as ABC Finance to find the best deal as they will find the best loans for you based on the fees, interest rates and overall cost, saving you money on your borrowing.
To secure the best deal on a loan, especially for debt consolidation or home improvement, it is crucial to compare various options available. Start by checking your credit score and report, which will impact the interest rate you receive.
If you have a poor credit history, consider bad credit loans or guarantor loans. Additionally, consider the type of loan you need.
Use online tools like loan calculators or mortgage calculators to compare interest rates, fees, and repayment terms. If you are unsure about banking jargon or options available, check FAQs or consult with a loan broker to find the best deal suitable for your needs.
What interest rates will I have to pay?
Secured loan interest rates that you will pay start at 6.5% per year and can be anything up to 12%.
The rates charged depend on your personal circumstances, the security property and what the funds will be used for.
You should also consider other fees that you may have to pay, such as lender arrangement fees, the valuation fee and any fees charged by your broker. In many cases, other than the valuation fee, most other costs can be added to the loan.
Secured loan broker fees
Broker fees are a big issue in the second charge mortgage market, with lots of brokers charging 12.5% broker arrangement fees (£5,000 on a £40,000 loan). Some are even charging as high as 15% on top of the loan.
At ABC Finance Ltd, we pride ourselves on never charging unfair fees to our clients. As such, we charge a flat broker arrangement fee for all secured loans, with no hidden application fees. On larger loans our fixed fee structure can make a big difference to the fees you pay.
Enquire now to talk through your needs with one of our experts, or call us on 01922 620008. Alternatively, enquire online and apply online for one of our low cost loans.
What’s the difference between a secured and unsecured loan?
The difference between between these 2 products is the fact that a legal charge is taken against an asset when you opt for secured borrowing. An unsecured personal loan does not involve security being taken over a property.
This means that should you fail to repay the loan, the risk of losing your home is lower than it would be with loans secured against property. This is because your lenders may be able to seek repossession, putting your property at risk, even if your mortgage repayments are up to date.
That said, you may be able to borrow more money when offering collateral and will usually get a much better deal, lenders give you longer to pay back and could go on to save you money.
When you borrow from a secured loan lender, the security offered also makes it more likely that your application will be approved, even if you don’t have good credit.
Types of interest rates
Lenders offer products with a fixed or variable rate. A fixed rate gives you certainty that your monthly payments will stay the same for the duration of the fixed rate period. Fixed rate products usually restricted the fixed period to the first 2-5 years.
After that, they usually move to the standard variable rate of your lender and the amount you repay each month may change.
Variable rate products can be linked to the Bank of England Base Rate, known as a tracker rate, they can be discounted (a discount on the variable rate), or the standard variable rate (SVR) of your lender. These products can see the amount you pay each month increase or decrease in line with interest rate changes.
How much can I borrow?
You can borrow anything from £10,000 with no maximum loan size.
The exact maximum will depend on the lender you choose, however, we have lenders to suit all loan sizes.
Try our secured loan calculator if you want to understand how much you could afford and your expected monthly repayments based on your loan size, loan term, interest rate and whether the loan is capital repayment or interest only.
How to get a secured loan
The question of how to get a secured loan you should do the following:
- Compare products – this can be done personally, or through a broker. Compare options from multiple lenders to make sure you’re getting the best deal.
- Complete the paperwork and prepare your documents – Make sure you have everything in order and ready to submit your application to your lender. If you’re not 100% set on a product, hold off on this step.
- Submit your application – Once you’re happy, you should submit your application to your chosen lender and begin the application process.
What can this type of loan be used for?
They can be used for the following:
- Home improvements
- Debt consolidation (to reduce interest, monthly repayments or increase to loan term)
- To purchase another property
- To finance a large purchase
- For business purposes
- To pay for a large event (such as a wedding, or education costs)
- Using buy to let secured loans to purchase an investment property
- Borrow money to buy a car
- Raise finance without having to repay your existing mortgage
What are the advantages?
The advantages are:
- They can be taken over a longer period of time than unsecured lending, which will reduce the monthly cost.
- You’re able to take out larger amounts due to the added security (also known as collateral) offered.
- They’re easier to qualify for than many of the alternatives, especially if you have a bad credit history or low credit score.
- You can secure one without disturbing your current mortgage arrangements, which is handy when you have early repayment charges, or are locked in to an excellent rate that you don’t want to lose.
- There is a wide choice of fixed and variable rates from reputable lenders.
What are the disadvantages?
The disadvantages are:
- They take longer to get than a personal loan.
- There is a risk to your property if you don’t keep up your monthly payment.
- You may be hit with extra charges if you pay it back early.
- Some brokers charge very high fees.
What are the alternatives?
The alternatives are:
- Remortgages – Remortgaging allows you to borrow against the equity in your home by paying back your current mortgage using a completely new one, often leaving you with money left over for your own needs.
- Unsecured loans – These are a viable alternative for amounts up to £25,000 that will be repaid over a term of 7 years or less.
- Credit cards – While not a great long-term option, credit cards are a great revolving credit facility. They can be used when funds will be drawn down and repaid regularly.
- Equity release – For borrowers over age 55, equity release allows you to borrow large amounts and roll up your interest costs, leaving you with no monthly payment to make.
- Bridging loans – Bridging loans are an excellent option when funds are needed quickly for a period of up to 12 months.
Getting a secured loan with bad credit history
A secured loan is potentially easier to get if you’ve suffered adverse credit or have a low credit score. These loans are known as bad credit secured loans.
It’s often easier to qualify for a second charge loan compared to other types of loan, such as an unsecured loan if you’ve got a poor credit history or low credit score. This is because you’re offering collateral over your home as a homeowner, which is a way of reducing the risk for lenders. It also allows you to reduce interest, get lower payments and a longer loan term.
Often, they can be your best option as you may be able to achieve much lower interest rates. In addition, the chances of being accepted are far higher than they would be for an unsecured loan.
Comparing the total cost of credit and whether you are happy to borrow against your home are important steps before borrowing. Our expert advisors are there to talk you through each step of the process and ensure you end up with the most suitable bad credit history product.
Acceptable types of poor credit history that we can consider include late payments, defaults, CCJs, IVAs, bankruptcy and historic missed mortgage payments.
Will a secured loan affect my credit score?
When you take out a secured loan, it could affect your credit score, depending on how well you manage the payments.
While they can help consolidate your debts and lower your monthly repayments, you need to make sure you pay it back on time, otherwise, you may face charges and even risk losing your home, which is often used as collateral for these types of loans.
If you make all your payments on time, your credit score may improve over time, and you could benefit from a lower interest rate. However, if you default on your payments, your credit score could be damaged, and you may struggle to get approved for credit in the future.
To get a better understanding of how a secured loan may affect your credit score, use a loan calculator and check your credit report before applying. It’s also important to shop around and compare loans, as interest rates can vary significantly between lenders. Finally, make sure you understand all the terms and jargon used in the loan agreement, including any fees, charges, and early repayment options.
What happens if I default?
As these loans are taken out against your property, if you default, your property may be at risk should you fall behind with the repayments. As such, it’s vital that you make sure that you can keep up repayments.
On top of the risk of repossession if you miss your monthly repayments on time, lenders may inform credit reference agencies such as Equifax and Experian. This will then show on your credit report, reduce your credit score and make it more difficult should you want to borrow money from a lender in the future.
Understanding secured loan monthly repayments
A secured loan can reduce monthly outgoings when consolidating debts such as an unsecured loan or credit cards, especially if you repay over a longer loan term. Although this is a real positive for many, the total cost of borrowing should always be considered when taking out a new loan.
If you extend the term of the loan term, though the initial monthly repayments may be less the overall cost can work out more. This is true even if you get a lower interest rate. It’s important that you consider all options before deciding to apply.
Frequently asked questions
Here are some of the commonly asked questions that we often hear.
How quickly can I get one?
If you want to borrow money from a lender quickly, this type of finance is a strong option. They can be completed in around 1-3 weeks. They take slightly longer than unsecured loans as your lender will have to assess the security property before you’re able to borrow the funds.
Are they hard to get?
No, they are relatively easy to get, especially so when compared to unsecured loans. As security is being offered, your lender will face less risk should you fail to repay the loan on time.
For this reason, the security offered makes it easier to qualify for secured borrowing, even if you don’t have a good credit score.
Can I pay off homeowner loans early?
Yes, you can repay early, although some products may come with early repayment charges in the early years. Products on the lender’s standard variable rate are more likely to be penalty free from the start of the loan.
What documents will I have to provide when applying for a loan?
You will have to provide the following when making a loan application:
- Proof of ID (such as a passport or driving licence). Some use electronic ID verification to make this simpler.
- Proof of address (usually a recent utility bill dated in the last 3 months.
- Proof of income (payslips and a P60 for employed applicants and tax assessment documents from HMRC if you’re self-employed).
How do secured loans compare to remortgages?
When comparing secured loans to remortgages, there are some important factors to consider. Secured loans require some form of security, such as a property or vehicle, to be pledged as collateral for the debt. Remortgages, on the other hand, involve switching your existing mortgage to a new lender or product.
One advantage of secured lending is that they may be more accessible to individuals with bad credit scores, as the lender has some security against default. However, they often come with higher interest rates and fees than unsecured loans.
Remortgages, on the other hand, may offer lower interest rates and the ability to consolidate debt or release equity, but can come with additional costs such as arrangement fees and legal fees.
Ultimately, the best option for you will depend on your individual circumstances, such as your income, budget, and financial goals. It is important to compare the costs and risks associated with each option, and to use tools such as mortgage calculators and credit reports to help inform your decision.
It is also recommended to seek expert advice from mortgage brokers or financial advisors to help navigate the jargon and find the best lender and product for your needs.
How should I manage my loan?
If you have a loan, it’s essential to manage it wisely to avoid defaulting on your payments. Late payments can negatively impact your credit score, making it harder for you to borrow money in the future.
Create a budget that includes all your monthly expenses, including your loan payments. It’s also important to understand the cost of your loan, including any fees and interest rates.
Consider using a debt consolidation loan to combine all your debts into one manageable payment. If you’re struggling to make payments, talk to your lender immediately to discuss your options. They may be able to offer you a payment plan or suggest ways to reduce your interest rate.
Remember to check your credit report regularly to ensure it’s accurate and up-to-date.
Is secured lending regulated?
Secured lending is regulated in the UK by the Financial Conduct Authority (FCA) when it involves borrowing against one’s own home. This means that most lenders offering secured loans are covered by FCA regulations, which provides greater consumer protection.
The interest rates charged tend to be lower than unsecured lending because the lender has some security against default. However, there are risks involved with secured lending, such as the possibility of losing one’s pledged asset if payments are not made.
Before taking one out, it’s important to carefully consider the cost, interest rate, fees, and any potential risks. Tools such as loan calculators can help with budgeting and understanding payments. It’s also important to check credit scores and credit reports, as these can impact the terms of the loan.
Who are the best lenders?
The best lenders include Shawbrook Bank, Oplo, Pepper Money, United Trust Bank, Together Money and Spring Finance.
Rates from 4.2% APR variable. To enable us to help customers with varying requirements we also have plans available up to 20.9% APR.
*Representative Example: Assuming you borrow £20,000 over 10 years at an Annual Interest Rate of 6.65% (variable) you would make 120 payments of £246.84 per month. The total amount repayable including a lender fee of £598 and a typical packager fee of £1,495 (added to the loan) would be £29,770.80. For comparison the overall cost would be 7.2% APRC representative.