A secured loan can be a comparatively simple way to access a substantial cash sum. This line of credit involves borrowing money from a secured loan lender and securing an asset – usually equity in your home – against this loan as collateral.
As the burden of risk of secured loans leans heavier on the borrower than the lender, interest rates are usually better than unsecured loans. You can also typically borrow higher sums over longer periods. Secured loans are available to borrowers with poor or below-par credit histories in more cases than equivalent bad credit unsecured loans.
However, there are some notes of caution to sound surrounding secured loans. If you fail to make repayments you could lose your home, and repaying a loan over 20 years or longer could cost you quite a lot of money in interest.
Secured loans are not ideal for everybody, so take the time to weigh up the pros and cons of this line of borrowing.
The advantages of secured loans
The advantages of secured loans are:
You can usually borrow larger sums than unsecured loans
As unsecured loans come with a measure of risk to the lender, who has no easy way to guarantee full repayment if the loan falls in default.
The most anybody can borrow on an unsecured loan is £25,000 in most cases, and that sum is usually reserved for customers with an excellent credit rating.
Many secured loans have no upper limit, and those that do impose restrictions will lend sums into seven figures. You can borrow as much as the equity in your home and your affordability allows.
Secured loan interest rates are usually lower than unsecured loan rates
As discussed, secured loans are considered lower risk than unsecured lending. Consequently, these loans typically have a lower interest rate than an unsecured counterpart.
Personal circumstances, including how much you borrow, your credit score, and the repayment term, can still influence the interest rate you qualify for. Overall, you’re likelier to receive an appealing offer from a secured loan.
You can get choose from a fixed or variable rate
If you are offered a fantastic interest rate, you can choose to lock this in as a fixed rate. This means you will always pay the same interest rate for an agreed term – usually up to five years. This will protect you from sharp increases in the Bank of England Base Rate, ensuring you will pay the same monthly payment for the duration of the fixed rate period.
If you don’t mind taking a risk, you could choose a variable interest rate instead. This means the interest you’ll pay on your loan will be renegotiated every year or two. If Bank of England Base Rate increases during the term of your loan, your repayments will also increase. If they drop, however, you will pay less.
The loan term offered can be either short or long – up to 30 years
Most unsecured loans are set to a shorter repayment schedule. It’s rare to find an unsecured loan term that runs longer than 10 years.
Secured loans can run up to three times this long, though if you are older than 40 you will likely be offered a shorter term that does not take you past the national age of retirement. While taking out a loan for 15, 20, 25, or even 30 years is a long commitment, it can also reduce your monthly repayments.
For example, borrowing £40,000 at an interest rate of 4% over 8 years would require monthly repayments of around £485. Double the loan term to 16 years, and you’ll only need to pay £280 each month.
Secured loans are good for your credit score
Taking out a secured loan can bolster your credit score, making them ideal if you have struggled financially in the past. Making regular repayments on time shows that you can be trusted in your financial conduct.
If you use a secured loan to consolidate a range of unsecured debts, you will also enjoy a superior credit utilisation score. Add up the credit limit on all the credit cards you currently hold, and review the balances. If you use more than 50% of your total available credit, this will be reflected in your credit utilisation score.
High credit use and additional unsecured debts such as loans or car financing suggest you rely on borrowing to manage your daily expenses. The closer you are to maxing out your credit cards, the more your general credit score will be affected.
Secured loans are not factored into a credit utilisation score. Taking out a secured loan is not quite “invisible debt,” but it’s considerably less impactful to your credit score than a range of unsecured debt contracts.
Secured loans can be completed quicker than a remortgage
It takes a couple of weeks to complete the process of applying for a secured loan, but it’s still often faster – and less invasive – than remortgaging. The latter approach could take months, as solicitors and other legal procedures need to be taken into account.
You can get a secured loan even if you have a low credit score
Unsecured borrowing comes at a risk to lenders, so most decisions are built around your credit history. You’ll need a credit score that ranks Fair at best to be offered a substantial unsecured loan, and if you want a prime interest rate, your credit score needs to be Good or Excellent.
Secured loans are considerably less influenced by credit score, as the fact that you’re placing an asset up as collateral offers a measure of reassurance. This means you’re much likelier to be accepted for a secured loan if you have previously experienced financial problems.
That doesn’t mean that lenders will hand just anybody a secured loan. Creditors do not want to force people out of their homes, and it’s much more fiscally prudent to offer loans to borrowers capable of making timely repayments plus interest.
This means thorough checks will be conducted, and if the lender has reason to believe you will struggle to keep up with your debt, you may not be offered a loan. You’re less likely to be judged on your past, though, with greater emphasis placed on the affordability of repayments in the present and future.
They can be used for any legal purpose
You will be asked why you are applying for a secured loan by your lender, but as long as your reasons are legally compliant, there is no reason why your application will be denied. Popular reasons for taking out a secured loan include:
- Consolidating multiple credit arrangements into one loan agreement.
- Major home improvements to increase or protect the value of a property
- Significant one-off payments, such as a new car, a dream holiday, or a wedding
- Using personal finances to invest in a business venture
- Making down a deposit on a second home or purchasing a property at an auction
The disadvantages of secured loans
Of course, for every benefit to taking out a secured loan, there is also a drawback. Ensure you understand the risks and limitations imposed by choosing this line of borrowing before you commit.
Most brokers charge very high broker fees
If you wish to take out a secured loan, you’ll likely need to use the services of a professional broker – very few reputable lenders will offer this line of credit to the general public. A broker can find the best deals on the market that match your circumstances.
As secured loan brokers offer professional services, they charge a fee for their experience and expertise. In some cases, this will be as high as 12.5% of the loan value, so if you borrow £40,000, you’ll add £5,000 in fees to your total repayable sum. These aren’t just the backstreet brokers either – you’ll pay these fees when working with MoneySuperMarket, Go Compare and Fluent Money!
At ABC Finance, we only charge a flat rate of £1,495, regardless of how much you borrow. We’re confident you will not find any other broker with comparable experience and expertise that offers such a competitive fee.
Your home is at risk if you fail to keep up repayments
Lenders are happier to offer secured loans to borrowers with poor credit because the risk falls on your shoulders, not theirs. If you cannot keep up with repayments, you will suffer more than a drop in your credit score.
Repossession is the ultimate endgame if you fail to repay a secured loan. This badly damages your credit file and can cost you a lot of money and stress.
Longer loan terms can result in paying more interest over the term
While secured loans can offer long loan terms that reduce your monthly repayments, the longer you commit to a loan, the more interest you’ll eventually pay. Consider this when deciding on your terms – sometimes, paying a higher interest rate over a shorter schedule saves you money.
For example, imagine you borrow £40,000 on a secured loan. Agreeing to repay this sum over 25 years may lead to a better interest rate than signing up for 10 years, but it will also cost more eventually. This table provides an example of what we mean.
|Loan term||Interest rate||Monthly sum repayable||Total repayable over loan term||Total cost of loan|
Weigh up all the factors that play into a secured loan, not just the interest rate. You must decide if lower monthly repayments in the shorter term trump greater long-term expense.
Some products come with early repayment charges in the early years
If you wish to pay off your secured loan before the end of the term, you will likely need to pay an early exit fee. This could be equal to a set number of months of interest or a percentage of the outstanding balance. In the loan’s early years, the latter could prove prohibitively expensive.
This makes it particularly inadvisable to take out a secured loan against your home if you’re planning to move in the near future. You will need to repay your loan when selling the property. Couple this with a high early exit fee and you’ll potentially lose substantial equity.
The temptation to borrow more can lead to financial difficulty
Initially, the idea of borrowing tens of thousands of pounds is hugely appealing. You can finally take that dream holiday, buy a second home, pay for your child’s dream wedding, get those home improvements made…
It’s also tempting to think, “in for a penny, in for a pound.” If you are going through the arduous process of applying for a secured loan, why not throw an extra few thousand on the sum you ask for? You’re unlikely to go through such an application again, and this is a rare opportunity to bolster your bank balance.
Remember that whatever you borrow needs to be repaid, with interest, long after you have spent the money. Consider your current and future financial positions when weighing how much you wish to borrow as part of a secured loan.
Do not bite off more than you can chew. Think about whether you can still make the repayments in 10 or 15 years, when your circumstances (including work and personal health) may be very different.
The application process is more time-consuming than the unsecured loan application process
Applying for a secured loan can be a long and occasionally frustrating experience. An unsecured loan is typically straightforward. You’ll pop your details into an online application form and have an answer within 60 seconds. Sometimes, you’ll even have the money in your account on the same day. When applying for a secured loan, it can take up to three weeks to receive your money. You’ll need to provide an array of documents, answer various questions from the lender, and have your asset valued by a third party. You’ll need to be patient when applying for a secured loan and ensure you’re always available to answer questions from a lender.