What is a secured loan?
A secured loan is a type of borrowing secured against an asset you own, like your home or a property you have a mortgage for. Secured loans are also known as homeowner loans or second charge mortgages.
Secured loans work like personal loans, but the value of your house acts as a guarantee if you’re unable to repay what you owe. Essentially you're borrowing against your home, so if you can't repay a secured loan, your property will be used to pay it back.
What is a secured loan for?
Secured financing tends to be used by people who need to borrow large amounts of money over a long time. You can use a secured personal loan for any purpose, but these are the most common reasons people take out a secured loan:
- home improvements
- starting a business
- buying a second property
- to consolidate debts
How does a secured loan work?
Just like a personal loan, you'll pay interest on secured loans, which means you'll pay back more money than you borrowed.
To be eligible for a secured loan, you need to own or hold equity in a property.
You may come across either fixed-rate or variable-rate secured loans; the type you choose will affect how much your monthly repayments are and the overall cost of the loan.
- Only homeowners with a mortgage are eligible for a secured loan
- The repayment term can be anything up to 35 years
- The amount you can borrow will depend on the value of your home
- Credit and affordability checks are required
- Various fees may be applied, e.g. valuation, search, broker fees
- Your home is at risk if you can't keep up with the repayments
How much can I borrow with a secured loan?
It will depend on how much equity you have in your home and how much you can afford to repay each month.
You can typically borrow between £10,000 and £500,000 if you have enough equity in your home.
A personal loan is an alternative option if you wanted to borrow less than £35,000.
How do I get a secured loan?
A secured loan is a long-term commitment, so it’s important to compare rates for the best secured loans to keep costs down.
You can search for a secured loan online with a comparison site like ours. When you submit a loan search on Choose Wisely we’ll use our selected secured loan specialist to find you direct lenders likely to lend to you.
Bear in mind that the amount of interest you'll pay depends on your credit history and the level of risk you pose to the secured lender.
How will I know if I'm eligible for a secured loan?
In most cases, you'll need to be:
- 21 years old or over
- A resident in the UK
- Own a property
You’ll need to provide personal details so your lender can carry out identity, credit and affordability checks.
You'll also need to provide details about the value of your property and how much you owe on your mortgage.
How long does it take to get a secured loan?
You may get a quick decision in principle, but typically the whole process will take approximately three weeks or more before you get the money transferred into your bank account.
You won't be able to get a secured loan instantly because several checks need to happen before the money is released. For example the following will need to be done;
- A property valuation
- Identity checks
- Credit checks
- Legal searches
Are secured loans easier to get than personal loans?
In some ways, yes, because you'll provide the lender with security and you’ll be viewed as lower risk to lend to.
If you’re eligible for a secured loan but have a poor credit score, you're more likely to get approved for a secured loan over a personal loan.
However, because several background checks will be carried out, and your home will need to be valued, the process of getting a secured loan will take more time than applying for a personal loan.
What happens if you don't pay a secured loan?
Missing payments or defaulting on a secured loan will be recorded on your credit report and damage your credit score. Not only that, your home may be repossessed if you do not keep up repayments.
Put simply; you could lose your home if you don't repay a secured loan. The lender will have the legal right to repossess your property, although this would be a last resort.
The lender may act quickly to start court proceedings if you ignore warnings, so it’s vital to talk to your lender as soon as you realise you may have difficulty repaying what you owe or you’re struggling to make repayments on time.
What's the difference between a secured loan and an unsecured loan?
Secured loans are when you borrow money and provide an asset like your home to guarantee the repayment of it. Typically secured loans tend to be for large amounts over £5,000, and you can borrow for up to 35 years.
Interest rates on secured loans are generally lower than personal loans but variable, which means the secured loan rate could change over your term.
A secured loan can be easier to be approved for if you have bad credit because you’re providing the lender with #collateral and therefore are viewed as less of a risk to lend to.
On the other hand, personal loans are not secured by an asset. Typically they’re for smaller amounts, have higher interest rates, and have shorter repayment periods.
Lenders view personal loans as riskier than secured loans, and your loan application will likely get rejected if you have a poor credit score.
What are the pros and cons of secured loans?
Secured loans can be a good borrowing choice for homeowners, but there are pitfalls to be aware of.
Here are the advantages and disadvantages to help you decide whether a secured loan is right for you.
- You can borrow large amounts of money, up to £500,000
- You can repay over a longer term, up to 35 years
- Interest rates are sometimes lower, especially for larger loan amounts
- It's easier to get approved because you're less of a risk to the lender
- You may be approved, even if you have a poor credit score
- If you default on your loan, your home could be repossessed to recover what you owe
- Secured loans take more time to arrange, and you'll wait longer for the funds
- Some loans have variable interest rates, so your repayments could increase
- The total cost of the loan may snowball due to interest rates and fees
- you may get hit with early repayment fees if you want to repay the loan early
Are there any alternatives to secured loans?
A personal loan is a standard loan from a bank, building society or lender. You don't need to provide an asset for security, such as a property, and repayment terms tend to be more flexible.
However, if you're hoping to borrow a significant amount for an extended period, this could be a costly option which lands you with sizeable monthly repayments.
Home improvement loans
Some lenders offer large unsecured loans designed for home improvements. You can typically borrow up to £25,000 and pay it back over a set time. They're often more flexible than personal loans so that you can repay early without penalty.
You'll need a good credit rating to get approval for a home improvement loan.
If the timing is right, this can be an ideal alternative to taking out a loan. You'll need enough equity in your home to release the funds and expect to pay some upfront fees. Also, you're extending the mortgage term, so you'll pay interest on your mortgage for longer.
Remember, if you have a fixed-term mortgage, wait until it ends so you don't pay early repayment charges.
Debt consolidation loans
A debt consolidation loan allows you to borrow a fixed amount to pay off numerous debts; for example credit cards, store cards and overdrafts with one monthly payment.
If you’re having trouble keeping track of what you owe, this can be a helpful way to manage your debts and build your credit score.
What documents do I need for a secured loan?
It depends on the secured lender, but you'll likely need:
- Mortgage statement
- Evidence of identity, i.e. passport or driving licence
- Evidence of income and expenditure
- Details of any outstanding debts like credit cards, store cards or other loans
Secured loans FAQs
It depends on the terms in your credit agreement, but there are often penalties for paying off a loan early, known as early repayment fees.
If you'd like the option to pay off your secured loan earlier than originally agreed, look for a lender who offers flexible repayments or low early repayment charges.
A hard credit check will leave a record on your credit report, but it shouldn't negatively affect your credit score unless you are declined, or multiple hard searches are performed within a short space of time.
If you're concerned about approval, using an eligibility checker on a comparison site like ours is ideal. We work with a specialist secured broker to find the best secured loan for your financial circumstances with only one application.
The good news is, if you have bad credit but are approved for a secured loan and make your repayments in full and on time, you’ll be taking steps to build your credit score.
Equity is the value of the property portion you own if you have a mortgage. So, if your home is worth £350,000 and you owe £100,000, the equity of your home is £250,000.
APRC stands for Annual Percentage Rate of Charge. It's the overall cost of the loan, including fees, broker costs, standard variable rate and any introductory rates on a secured loan.
Look at the APRC to get an accurate picture of how much the loan will cost you in total when you're comparing secured loans.
As always with secured loans, the following risk warning applies: