Just when you thought you’d got your head around your finances, secured loans are thrown into the mix!
However, you’re not to worry. Here at Finance Rate, we believe everyone deserves to have access to easily understandable financial information so you can feel confident in your financial decisions. That is why our money guidance is straightforward, unbiased, and clear of any jargon.
The best bit? It is also completely free! Finance Rate wants to be your trusted resource so that you can feel confident when it comes to making the best decisions about your financial future.
In this guide to secured loans, we will be exploring:
- How secured loans work
- The advantages and disadvantages of taking out a secured loan
- The various types of secured loans available to borrowers
- How to know if you are eligible for a secured loan
- What you need to take out a secured loan
- The interest rates attached to a secured loan
- And much more!
So, let’s get started so you have all the knowledge you need to make the best financial decisions for your future.
What is a secured loan?
A secured loan is a type of loan that allows you to borrow large amounts of money over a longer period of time compared to regular loans. This is because, to get a secured loan, you have to put one of your assets at risk, which, in turn, reduces the risk to lenders.
The lending providers use your asset as their security during the repayment period. So, if for some reason you fail to meet the repayments on time or break the loan terms and conditions (T&Cs), you will have put your asset at risk of repossession by the lender.
More often than not, this asset is your home, which is why this type of loan is sometimes better known as a homeowner loan. However, the asset – which can also be referred to as collateral – does not have to be your home. For example, it could be:
- Your car
- Any stocks or bonds
- Expensive jewellery
- Cash savings
- Fine art collections
- Any type of antiques
As long as whatever you opt to use as collateral is worth more than the loan amount, it should be sufficient equity to be used as your asset. Of course, this will likely depend on the terms and conditions of your lending provider and will have to be approved during the secured loan application process.
How do secured loans work?
Just like all types of loans, secured loans work by making monthly payments back to your provider. Not forgetting you have to pay the loan interest rates, too!
As is to be expected, the amount of interest you pay back is dependent on the type of loan you have secured. For example, this could be a fixed annual rate or your lending provider may offer variable rates instead.
As a secured loan is tied to one of your assets, such as your property, there is a reduced risk for lenders as it is thought that borrowers will be more incentivised to pay back the money due to the high stakes nature of a secured loan. Therefore, lending providers are more inclined to offer larger loans even if you have a bad credit report.
If for some reason you fail to meet one of your regular payments, the secured lenders can seize your asset and sell it as a way to reclaim the money they need to balance the debt.
Before you undertake any secured borrowing, you should always evaluate your financial circumstances so you are confident that you can afford not only the monthly payments on time, but the additional charge from interest and other fees too.
It may be best to look over your bank statements or try a secured loan calculator to assess your money situation before making such a financial commitment. This way you can ensure your current financial circumstances are not affected by any potential missed or late payments, which will ultimately leave you with a poor credit history.
How do secured and unsecured loans differ from each other?
As secured and unsecured loans are, unsurprisingly, simply different types of loans, there are some notable similarities to them. This includes:
- Borrowing money from a lender
- Regular repayments
- Missed payments affecting credit scores
However, there are also some big differences between the two types of loans.
|You need to use one of your assets as collateral for lenders.
|Unsecured loan providers do not require any type of asset as collateral.
|With secured loans, you can borrow larger sums of money – usually up to £100,000.
|More often than not, smaller amounts of money can be borrowed with unsecured loans – typically the maximum amount is £25,000.
|Due to the collateral involved in this type of loan, the monthly instalments can be paid over a longer period of time. With some even up to 35 years!
|As this is usually a personal loan, you have a shorter amount of time to pay back the money you borrowed. Your repayment plan typically goes up to five years, but some providers do offer seven year plans.
|As the loan payments are spread over a longer period of time, you may be able to get cheaper interest rates which reduces your monthly loan repayments.
|With less time to repay your loan, you will likely have higher monthly costs to ensure you repay your entire loan on time.
|Even though the interest may be cheaper, you are likely to receive variable interest rates due to the length of your repayment plan.
|Most unsecured loans come with an agreed fixed-rate term for interest so that the loan provider receives some interest in return.
|Even if you have a bad credit history, you could be eligible for a secured loan due to the asset aspect of this type of loan.
|The lack of collateral involved in this personal loan means you will need a high credit rating to be approved.
|If you miss one of your repayments, the secured loan lender can repossess your asset and sell it to get back the money.
|Your credit scoring will be affected if you miss one of your monthly repayments on an unsecured loan.
As you can see, there are advantages and disadvantages to both types of loans. Therefore, deciding which style of loan is the right one for you can be difficult. You should consider the following before deciding to take out any style of loan:
- Why you need a loan
- Your monthly income
- Your total outgoings
All of these should influence your decision, and remember, the right type of loan for you is one you can pay back to ensure you do not end up with a poor credit score.
Why would you take out a secured loan?
It is often believed that unsecured loans are the better, or more safer, type of loan compared to secured ones. This is due to:
- The lack of collateral involved
- Smaller amounts of money borrowed
- Fixed-rate interest plans
However, there are reasons as to why some people may opt to take out a secured loan. Perhaps the most obvious type of secured loan is a mortgage, but there are other reasons for taking out a secured loan. Some of these include:
- Consolidating your existing debts – Some people find one larger monthly sum a more manageable payment than lots of smaller ones.
- Paying for one-off events – This can include weddings, honeymoons, and funerals.
- Starting a new business – Aside from secured loans, you can also get dedicated business loans which may be more suitable to your needs.
- Paying for school fees – Most private schools tend to have tuition fees, so you may choose a secured loan to pay for these.
- Buying a car or other type of vehicle – If you choose to take a car or different type of vehicle out on finance, it may be a secured loan (depending on the terms and conditions) or you can simply take out a loan to buy the vehicle outright.
- Making improvements to your home – You may take out a secured loan to add an extension to your house or redecorate one of your rooms.
- Buying a piece of land – The land in question will then be used as the collateral in this type of secured loan.
No matter what your reasoning for taking out a secured loan, just be sure you can meet the monthly repayments and do not leave yourself with additional financial difficulties.
Secured loans: what types are available?
With such a high number of reasons to take out a secured loan, it is probably no surprise to hear that there are different types of secured loans too. The reason why you need to borrow money should influence the type of secured loan you take out.
Debt consolidation loan
More often than not, people take out debt consolidation loans in order to pay off any existing credit that is owed.
Note: Not all debt consolidation loans are secured, so make sure to check what style of loan you are taking out before signing on the dotted line!
By opting for this style of secured loan, you can:
- Reduce your monthly repayments
- Reduce the amount of companies you owe money to
- Reduce your debt’s interest rate
The number of ‘reduces’ in that reasoning may lead you to believe a debt consolidation loan is a one way ticket out of your debt. And it can be! However, it also comes with lots of risks and additional costs that could eventually make your financial situation even worse and lead to a poor credit rating.
If your credit profile is already bad, you may not be eligible for this style of loan.
Perhaps the most recognisable and understood type of secured loan, a mortgage is a loan that you use to buy a property – whether that be a flat, house, or even a piece of land.
More often than not, to secure a mortgage, you need to put down a cash deposit. Typically, this is 5% of the price of the property. You then use the loan, in this case mortgage, to pay back the bank or building society.
Mortgage repayments are usually over a long period of time, such as:
- 25 years
- 30 years
- 35 years
The set amount of time you have to pay back your mortgage is dependent on the provider you go with. If you end up missing your monthly mortgage payment, your property can be repossessed by the lender.
A secured homeowner loan is a type of loan that uses your house or flat as collateral. This security allows you to borrow a significant amount of money against your property. Most people take out a homeowner loan if for some reason they fall behind on monthly payments.
In order to be eligible for this style of secured loan, you must own part, if not all, of your home. For this reason, a homeowner loan is sometimes known as a second-charge mortgage – with your original mortgage being the ‘first’ charge. However, second-charge mortgages can also be the name for a different type of secured loan (isn’t that always the way) but we will explain this later!
The amount of money you are able to borrow with this style of loan is dependent on the Loan-to-Value ratio (LTV). More often than not, lenders have different criteria for their LTV due to a number of factors, such as:
- Current mortgage
- Household outgoings
- Your credit score
- Employment status
- Any current debt
Your age and entire loan term will impact the amount of money you are able to borrow for this style of secured loan.
If you decide to apply for a homeowner loan, you will need to inform your current mortgage lender of your new circumstances. This is to make sure that, if for some reason you are unable to pay back the homeowner loan and your property is repossessed, the lender will first pay back your mortgage provider and then if there is any money leftover, it will be used to pay off your loan.
This type of second-charge mortgage differs from homeowner loans as it is typically used for costly home improvement projects, such as extensions or remodelling a kitchen or bathroom. However, some people take out a second-charge mortgage if they want to buy a second home or other type of property.
A second-charge mortgage differs from remortgaging as you do not update your original mortgage, you pay it alongside your current mortgage – also known as your ‘first’ charge. Due to this, your second-charge mortgage is more often than not from another mortgage lender.
In order to be eligible for a second-charge mortgage, you need to already be a homeowner. Saying that, you do not have to be living in this property to get a second-charge mortgage.
The amount of equity you own in your property will influence how much your new provider is willing to lend you.
This style of secured loan is used to ‘bridge the gap’ from completing on a new property and selling your old one, hence the name! This style of secured loan is perfect for those who need access to funds as soon as possible – with some lenders releasing their funds anywhere from two weeks to a month.
Bridging loans can be used for commercial property and personal ones.
There are two main types of bridging loans:
- An open bridging loan
- A closed bridging loan
There are some significant differences between the pair.
An open bridging loan
This type of bridging loan is predominantly used for urgent purchases. More often than not, an open bridging loan does not need a thoroughly detailed plan on how the borrower plans to repay the loan. Due to this, there is usually no set date that the debt needs to be paid back by. Saying this, borrowers typically have a year from the date they took out the loan to repay it in full.
A closed bridging loan
For this style of bridging loan, borrowers are required to have specific details about their loan. This can include:
- A completion date for the sale of your property
- How the bridging loan will be paid back
- The exact date it will be paid in full by
Most closed bridging loans are paid back within a few months, as they are usually taken out by people who are part way through a house sale, but are still waiting for the funds so that they can complete on their new property.
A logbook loan uses a vehicle as the collateral in exchange for the loan. Different types of vehicles can be used for logbook loans. This can include:
Due to the various vehicles eligible for a logbook loan, lending providers assess each vehicle before deciding how much you are allowed to borrow from them. However, the highest logbook loan you will be eligible for will be a specific percentage of your vehicle’s value. Typically, logbook loans can be from £500-£50,000. Of course, this depends on your provider.
More often than not, this style of secured loan is for the shorter term, and is usually paid back in full within 18 months of taking out the loan.
Note: Logbook loans differ to car finance deals as the latter provides you with a way to purchase a vehicle. Logbook loans give you a means to borrow money by using your vehicle as collateral.
You can continue to drive your vehicle whilst you are making payments for your logbook loan. However, your provider will likely make you give them your vehicle registration documents or logbook – also known as a V5C – which makes them the registered owner of your vehicle during this time.
Even if the lending provider does not require you to give them your documentation, by taking out a logbook loan, you are signing over your vehicle’s ownership to them until your loan is paid off.
If you fail to make any of your payments during this time period, your vehicle will be taken away and sold to repay the lenders.
Note: In the UK, logbook loans are available in England, Wales, and Northern Ireland, but are not an option in Scotland.
A guarantor loan is a type of loan in which a ‘guarantor’ – usually a member of your family or a close friend – is added onto your repayment terms and conditions. This is because if you cannot make your monthly payments, they guarantee to make your payments for you.
Guarantors are usually needed for people who struggle to be approved for loans – usually due to bad credit scores. They are commonly used with unsecured loans, however, they are sometimes used with secured loans too.
- Be at least 18 years old (for some providers, you actually need to be 21)
- Hold a bank account
- Be in employment
- Know the ‘guarantee’ (the person taking out the loan) as a family member or friend
- Have a good credit score
- Be a homeowner
Note: For some lending providers, the guarantor cannot be financially attached to the guarantee, which does eliminate some people from your list of potential guarantors.
Of course, with a guarantor loan, if you cannot make your repayments, it is presumed that your guarantor will make them for you. However, if for some reason your guarantor also cannot make the payments, interest will keep being added to your loan and classed as an ‘arrears’ – an overdue loan.
Both you and your guarantor will get bad credit ratings from the missed payments. Plus, both of you could face legal action. As this is a secured guarantor loan, both of your assets will also be at risk of repossession.
Therefore, it is crucial that you make your secured loan payments so that not only you, but also your guarantor, can avoid any potential negative repercussions.
This type of secured loan is specifically for those aged 55 or above with a mortgage that they have been paying off for numerous years. Equity release sounds like what it is – the amount of equity you have built up over the years of paying your mortgage can be released as tax-free cash.
This can either be as one large lump sum or several smaller amounts of money over a longer period of time. However, with the latter option you will pay some interest on these payments.
The amount of money you are able to release is dependent on your age and the value of your home. Plus, you are able to stay in your home or even move house despite releasing equity from your current property.
More often than not, equity release providers will offer a no negative equity guarantee. This is confirmation that you will never owe more money than the total value of your home once it is sold.
With equity release, there is no necessity to repay your secured loan until you move out of your house or pass away! However, if you do decide to start paying back your loan, there are usually multiple flexible payment options for you to choose from, but you may be subject to an early repayment charge.
Depending on the type of equity release you opt for, you may start to increase your interest amount in rapid succession. In turn, this can reduce the amount of equity left in your property. Therefore, once you do die, the inheritance your loved ones may receive could be significantly lower than previously thought.
Secured loans: what are the advantages to this style of loan?
If you are considering taking out a loan, but are unsure which type of loan is right for you, you may consider taking out a secured loan due to the numerous advantages this style of loan has.
You can borrow larger amounts of money
By putting one of your possessions up as collateral, secured loan lenders are far more encouraged to offer you larger amounts of money than you would get with an unsecured or personal loan. For example, the maximum amount you can usually borrow with a personal loan is £25,000, but some secured loan providers allow you to borrow up to £100,000!
The money can be paid back over a longer period of time
More often than not, secured loan lending providers offer longer payback periods – usually somewhere between five and twenty years! This is due to the collateral involved in this style of secured loan.
The monthly repayment costs are far lower
As the loan is spread out over a number of years, this means the monthly repayments of the loan are significantly lower than an unsecured loan, for example. This is often the case even if you borrow big sums of money.
The interest rates are usually lower
The collateral involved in your secured loan agreement usually means you are able to receive competitive interest rates, therefore making your monthly interest payments far lower.
Secured loans are easy to qualify for
As we have already mentioned, secured loans are a great option for people who have poor credit scores, perhaps from already existing credit card debt or previous financial struggles. It is also a great option to go for if you are self-employed and find lenders are less inclined to offer you a loan.
It should not affect your current mortgage situation
If you decide to take out another secured loan in combination with your current mortgage, your new secured loan should not affect your existing mortgage. This may be an option if you have early repayment charges, for example, or your current rates are at a great price that you do not want to miss out on.
There is a wide choice of secured loans
Due to the sheer range of secured loans available, there is a wide range of secured loans that come with either fixed or variable rates. Plus, there are multiple reputable and trustworthy lenders for you to choose from if you decide a secured loan is the right option for you.
Secured loans: what are the disadvantages to this style of loan?
As the saying goes, nothing is ever as good as it seems, and, unfortunately, this is also true of secured loans. If you decide you want to take out this type of loan, it is important that you are also aware of the risks involved with borrowing money in this way.
The length of the payback time may mean you pay more
We know we previously said the longer payback time of a secured loan is a good thing. And it can be! However, by paying your loan off over a longer period of time, you may end up paying more than the original total amount of your secured loan due to the interest being paid over a number of years.
Your property is at risk of repossession if you miss a payment
Perhaps the biggest risk of a secured loan is the potential for losing your property if you fail to keep up your monthly repayments – also known as a default. (Don’t worry, we will explain more about defaults later!)
Note: Do not forget, if you have a guarantor on your secured loan, this person is also at risk of losing their property – whether that be a house, car, or another asset.
Secured loans can sometimes take longer to get
More often than not, taking out a secured loan takes far longer than its unsecured equivalent. This is usually due to the checks that need to be done prior to your loan application being accepted by the lending provider. Although, there are a few exceptions to this, such as an open bridging loan.
You may face early repayment charges
If you want to finish paying off your loan earlier than expected, you may be subject to some additional charges for doing so. Naturally, the amount you will have to pay is dependent on your lending provider as well as the terms and conditions of your secured loan.
You could be subject to high broker fees
When you take out your secured loan, you may consider getting the help of a broker who will likely be able to match you with a suitable lending provider. However, you will probably need to pay the broker for their help in finding you a secured loan. Depending on the amount of money you borrow through your secured loan, you may end up paying fees of up to 12.5%!
Therefore, you may end up paying thousands in fees on top of your loan – meaning you have to pay back even more money!
To prevent any shocking unknown costs, you could always ask your broker what their fees are before you agree to work with them.
You may end up with negative equity
If the asset you use as security in your secured loans decreases in value over time, you may end up owing your lending provider more than the original loan. This is known as negative equity – as the value of your asset is less than the outstanding balance on your loan.
Therefore, if your secured loan lender ends up repossessing your collateral, you may still owe them money – specifically the difference.
If you have bad credit you could face high interest rates
Although most secured loan lending providers offer competitive interest rates, if you have a poor credit score, you may only be offered high secured loan interest rates. Of course, the higher your interest, the more money you will pay overall.
If you use a secured loan broker, they may be able to find some cheaper options for you. However, if you want to do it yourself, you could check out price comparison sites to find low-cost interest rates.
Note: Before agreeing to a secured loan, it is best to double check whether your interest is a fixed rate or variable. (More on this later!)
You could pay high setup fees
Some secured loan providers expect you to pay lender fees which can quickly add up! Some of these additional charges can include:
- Setup or arrangement fees
- Annual Percentage Rate of Charge (also known as APRC)
- A valuation fee to see how much your collateral is worth
Always know exactly what your additional costs will be before you agree to take out a specific secured loan so you do not end up in a worse financial position than you began with.
What you should know before you get a secured loan
A secured loan should only be considered when there is no other choice available. This is due to the risk involved in this type of loan. If you do believe a secured loan is the only answer to your financial situation, there are some factors you should consider before undertaking this commitment.
The purpose of your loan
We have already discussed some of the reasons as to why you may decide to take out a secured loan. Some of these include:
- Consolidating any existing debts
- Paying for one-off occasions
- Making improvements to your home
Despite this, some secured loan providers only offer loans for specific reasons – for example, only personal circumstances and not for business purposes. So, before you spend (potentially) hours filling out application forms, it is best to double check if the lender you are applying to accepts the purpose of your loan.
Plus, having a specific goal in mind could be that extra bit of motivation you need to make your monthly repayments.
Your Loan-To-Value ratio
Your LTV (loan-to-value) ratio is the amount of money lending providers are willing to offer you. This sum of money is calculated through the ratio of the loan to the value of your asset. In basic terms, they will look at the value of your property and also take into consideration how much you have left to pay.
If you cannot repay the loan in its entirety, the lending provider needs to know how much money they could make back from selling your collateral.
The higher the amount of equity you hold in your property – whether this be a home, vehicle, or something else entirely – the lower the potential risk to lenders. Therefore, the more equity you own, the higher the amount of money you are entitled to borrow.
Evaluate your income and outgoings
It is not an overstatement to repeat the dangers that come with missing monthly repayments of your secured loan – your property being taken away from you and potentially sold! In order to ensure this does not happen to you, it is best to evaluate any regular income as well as your outgoings.
There are some questions to ask yourself when doing this activity:
- Do you have any future expenses planned? For example, starting a family or big holidays.
- Are there any lifestyle changes you could make to give you additional disposable income?
- Do you have any other debt to pay alongside this? This could be paying off credit cards or another mortgage.
By doing this, you will have a better understanding of how much you can afford to borrow from a lender in a way that ensures that you can comfortably make each of the monthly repayments to avoid any future difficulties.
Your credit history
It seems no matter what aspect of finances you are talking about, your credit rating will always be taken into consideration. We have already discussed how you do not need a spectacular credit score to be eligible for a secured loan, but most lenders will undertake a credit check before accepting your application for a loan. These checks are categorised as:
- Soft credit searches
- Hard credit searches
Usually, lending providers will undertake a hard credit check to explore how you have previously managed your finances. More often than not, lenders want to be aware of your borrowing history as well as any county court judgements (CCJs) or high court judgements you may have for debt.
Unlike a soft search, any hard searches are able to be seen by others also searching your credit report. If you have numerous hard credit checks in a short amount of time, it can reflect poorly to lenders as you appear desperate for credit. This can also reduce your credit rating.
Consider a guarantor
Of course, not every type of secured loan – or person applying for a secured loan – needs a guarantor. However, if you have a poor credit history, a guarantor may be your only way to borrow more money.
Asking a loved one to be your guarantor is a big undertaking due to the potential implications it could have on their financial security and possessions.
So, before asking someone to be your guarantor, you should consider the effects it could have on your relationship with that person and whether or not you want to risk ruining that.
Assess the interest rates
More often than not, a secured loan will come with a variable interest rate, however, this is not always the case, so you should double check the terms and conditions of your loan.
Plus, you should also take into consideration the fact that interest rates can easily rise. Therefore, when working out how much you can afford to borrow from your secured loan provider, you should take into account a potential rise in interest rates.
Note: The interest rate you are offered will likely differ from the one advertised by your lender. Your specific amount will depend on how much you would like to borrow, the length of your repayment plan, your credit score, and the value of your asset.
How much money am I able to borrow from a lending provider with a secured loan?
The amount of money you are able to borrow with a secured loan is typically dependent on the value of your collateral and how much of it you own. The higher the worth of your asset and your equity in it, the more money you are usually able to borrow from a lending provider.
Note: You will not be able to borrow more money than the value of the equity available. Plus, certain lending providers will request you borrow less money than that anyway.
More often than not, secured loans range from as little as £500 but can range all the way up to £100,000. However, you can borrow even higher amounts of money with a specialist lender!
Of course, the more money you borrow from a lender, the more you will end up paying back with interest and fees included.
What are the interest rates like with a secured loan?
Just like any type of loan, secured loans can come with different levels of interest. Typically, these rates are split into three categories:
- Fixed for term – Also known as fixed-term rates, with this interest rate you will pay the same amount for an agreed fixed period of time. Once this fixed term is over, you may be charged your lending provider’s standard variable rate.
- Variable rate – With this level of interest, you will pay a monthly fee that is in line with the Bank of England’s base rate at that moment in time. This base rate fluctuates due to numerous factors and, therefore, is a rate that can vary in number.
- Short-term fixed rate – This type of interest rate is usually a fixed rate for an introductory period. More often than not, this period is up to five years. After this, you are moved onto your lending provider’s standard variable rate.
Usually, anyone applying for a secured loan is eligible for a fixed-term rate as long as you have a high-value collateral. Of course, this is to be determined by your lending provider.
The actual amount of interest you could pay on your secured loan is usually between 2-10%, but this can vary. Your specific interest rate is dependent on a number of personal factors.
How do I know what kind of interest rate I will get with my secured loan?
No matter what level of interest rate you are offered, the amount of interest you could end up paying on your secured loan is influenced by multiple factors.
The amount of money you borrow
Interest is a percentage of how much money your loan is. Therefore, the more money you decide to borrow, the more interest you will pay.
The length of time you are borrowing for
Although it may initially appear like a better deal to spread your loan’s monthly repayments over a long period of time – for example, 30 years – you could actually end up paying more money than you originally borrowed. This is because you will be paying interest for a long period of time.
Your credit file
Your previous credit history will impact your interest rates. For example, if you have had any other types of debt and managed to pay them back in full and on time, you will more than likely be offered a low interest rate. However, if you have a history of missing loan payments, it is probable you will be given a higher interest rate.
The amount of equity you have in your asset
As we have already mentioned, the equity you own is the difference between the value of your property and the amount you owe. Overall, it is believed that the more equity you own in your collateral, the lower the interest rate you will be offered for your secured loan.
What is the cost of borrowing with a secured loan?
This may seem like a silly question, but the total cost of a secured loan is far more than the original loan you apply for. The overall cost of your secured loan is dependent on a number of different factors. These include:
- The amount of money you choose to borrow – In layman’s terms, the more money you borrow from a lender, the more it will cost you.
- The total length of your repayment plan – The longer the number of years you decide to pay back your secured loan, the more you will end up paying overall due to interest.
- Your interest rate – Speaking of interest, the type of interest rate you have will dictate how much money you end up paying back each month. You may feel like you have a cheap level of interest, but you may still end up paying more overall if you have a significant number of years to repay your secured loan.
- The loan fees attached to your secured loan – As we have already discussed, there are fees attached to setting up a secured loan. If you decide to use a broker to secure your loan, you will also have to pay them for their services.
All of the fees attached to your secured loan are known as an APRC – Annual Percentage Rate of Charge. This percentage is a total of all of the costs of your secured loan combined.
Note: An APRC shows possible borrowers the impacts different interest rates could have on your secured loan and how changes in these rates could influence your payments over your repayment period.
How do I know if I am eligible for a secured loan?
Even though the provider has a level of security in this style of loan due to the collateral involved, they need to be sure borrowers can afford to repay the loan back. Therefore, there are a number of factors they must take into consideration before they make this decision.
As is to be expected, the criteria you need to meet for a secured loan depends on a number of factors. This can include:
- The type of secured loan you are applying for
- Your age when applying for the loan
- Your employment status
- Your monthly income
- The value of the asset you are willing to risk
- The amount of debt you currently have
- The purpose for your secured loan
What is the application process for a secured loan?
Once you have decided a secured loan is the right financial decision for you, you can get started on the application process. More often than not, you need a specific set of documents no matter who the lending provider is.
The usual documents for your application details are:
- Proof of identification – Either your passport or driving licence.
- Proof of address – Usually from a letter that is dated within the past three months.
- Proof of income – One of your payslips or another HMRC document related to tax.
When you have your documents together, you can apply for a secured loan, approach a credit broker, and finally submit an official application.
Usually you can apply for secured loans online, however, some lending providers may prefer physical copies of your application documents.
Once the formal application process has started, it will then take a few weeks to be accepted. If your loan application is approved by your lending provider, you will likely receive your secured loan from as little as a week to potentially three weeks.
If I have a bad credit history, is it possible for me to get a secured loan?
In simple terms, yes, if you have a history of poor credit you are more likely to be accepted for a secured loan rather than an unsecured, or ‘personal’, one. This is largely due to the collateral involved with a secured loan.
Usually, a home of some form (a house or flat, for example) is the best type of asset you can use when you have poor credit, due to the risk attached to losing your home.
However, just because you have a higher chance of being accepted for a secured loan, does not necessarily mean your negative credit rating will be forgotten.
For example, as you have a history of bad credit, lending providers will view you as a higher risk and therefore your borrowing options will tend to be far fewer than someone with a good credit score.
Usually, the loan amount and rates attached will be influenced by your past. So those applying for a secured loan with a poor credit rating may only be offered £5,000 or less. Although this may seem like a small amount of money, the rates and fees attached to your specific loan will likely be high due to your poor credit history so you may actually end up paying back even more than the initial £5,000.
Note: Although secured loans are considered to be the better option for those with bad credit, secured loan lenders still have the option to decline your loan application if they believe you are too high of a risk.
Can taking out a secured loan improve my credit rating?
Again, in simple terms, yes – taking out a secured loan can potentially improve your overall credit rating. Therefore, if you are looking to establish credit if you do not currently have any, or would like to improve your credit rating after a poor history, a secured loan may be the right solution.
However, if you have a history of bad credit, taking out a secured loan should be done with caution. If for whatever reason things were to go wrong, it could have disastrous consequences to you, and potentially others.
The risk of repossession
By now we all know that a secured loan works by using some form of collateral as security for the lending provider. However, if you miss one of your monthly instalments – or default – your asset could end up being repossessed by the secured loan lender.
If this were to happen, the implications of this action could lead to you potentially being homeless! Therefore, if you do decide to take out a secured loan, it is best to find a rate that you can comfortably afford to pay back (even if your interest rate was to increase) to reduce the chances of this outcome.
Your credit rating could end up worse
If your aim of taking out a secured loan is to improve your credit rating, it is hoped that you will have a plan in place to ensure you can meet each and every one of your loan repayments. Therefore, improving your credit rating either from something negative or simply non-existent!
Although, if for some reason you do end up missing one of your monthly payments, and if one turns into a few, which then snowballs out of your control, you could end up in a far more devastating financial situation than the one you initially started in.
If this was to happen, you could potentially have your collateral repossessed as a way to pay back the loan you owe to your secured lending provider.
The implications to your guarantor
As we have already discussed, to provide your lending provider with another sense of security, you may be asked to include a guarantor with your loan application. This way, if you do happen to default on your payment schedule, it is expected that your guarantor will make your repayment for you.
However, if for some reason your guarantor also cannot afford to make the repayment, both of you could face the consequences of these actions – or lack of – despite it being your loan!
Therefore, if your secured loan does have a guarantor attached to it, it is imperative you do everything you can to make your monthly payments to prevent both you and your guarantor from facing repossession.
What are defaults?
In layman’s terms, a default is a missed payment on a loan – whether that be the principal payment or the interest and fees attached to your loan. A default can be as little as a couple of pounds all the way to thousands owed, it does not matter as, at the end of the day, it is still money owed to your lending provider.
Note: Depending on your secured loan agreement, your lending provider should have to issue you a default notice before you are subject to legal action from them.
If you do end up with a default on your secured loan, the collateral you used – and your guarantor if you needed one – would be in danger as your lending provider is legally allowed to repossess your asset to pay off the money you owe.
There are some other negative consequences of defaulting on your secured loan. These include:
- A default can stay on your credit history for around six years – although this can be longer in some cases. This is true even if you pay off your default as soon as possible.
- As your credit history is now tainted, it can lead to a negative credit score.
- Due to the above point, you will be less easily approved for a loan in the future – whether it be secured or unsecured.
- If you are able to secure a loan, your interest rates are likely to be far higher due to the risk you pose to lending providers.
- You may be subject to ‘garnishment’. This is where your employer is court ordered to deduct money from your wage or bank account until your debt is paid off in its entirety.
Note: If you can prove that your default is a mistake, it will be removed from your credit history and should not affect any future financial endeavours.
How can I reduce the impact of a default?
If you do end up with a default on your credit history, there are some things you can do to reduce the impact it will have on your financial future.
- Pay off your default as soon as possible – It is no surprise that this is one of the ways to reduce the negative consequences of your default. But by paying off your default, it will be classified as ‘satisfied’ on your credit history, and therefore look at least somewhat better to potential future lending providers.
- Use other methods to improve your credit rating – Yes, you will have your default blemishing your credit rating for numerous years, but if you can attempt to improve your credit score through other means, such as paying a loan off on time, it could balance out the negativity of your default.
- Add a note to explain your situation – Sometimes, you end up in debt for reasons that are out of your control, for example, you could suddenly be taken ill or be made redundant without warning. It may not remove your default, but this explanation may help future decision makers excuse it and change their mind about lending you money.
- Let time do its thing – It is that age-old saying back again: time heals all wounds. As awful as it is at the time, a default will eventually be removed from your credit report. Plus, as a few years pass, you may find lenders will be more inclined to let you borrow money due to the time in between the offence and the time you apply.
Can I take a payment holiday on my secured loan?
If you are struggling to keep up with your loan’s repayment schedule, your lending provider may be able to offer you a ‘payment holiday’.
Simply put, a payment holiday is an agreement between you and your secured loan lender that you will take a break from your monthly payments for a certain amount of time, which is why it is sometimes referred to as a ‘payment break’.
During your break from payments, it is likely that your interest rates will continue to be added to your total loan amount. Therefore, once you go back to your repayment schedule, your monthly payments may increase to reflect this.
Before you agree to a payment holiday, it is best to speak to your lending provider to ensure you are able to make the new monthly payment amounts once they recommence.
Note: A payment holiday may be visible on your credit history, and could affect your overall credit rating. So, again, it is best to discuss this decision with your secured loan lender. Especially if you are trying to build up ‘good’ credit after a default or other negative history.
How do I apply for a payment break?
To apply for a payment holiday, you simply just request one from your secured loan lender. However, whether they approve your request or not is another matter entirely.
Within your request application, you will have to inform your lending provider with:
- The reasoning for your payment break request
- Your current financial situation
- How the payment holiday could benefit your repayment schedule
- When you believe you will be able to start your monthly payments again
If your secured loan lender does deny your application for a payment holiday, it does not necessarily mean that there is no more support for you. Usually, your provider will offer you some form of ‘specific support’ to help your individual circumstances. For example, this could be reducing your monthly repayments to make them more manageable.
Am I able to pay off my secured loan sooner than planned?
If you find yourself in a financial situation where you are able to pay off your secured loan earlier than expected, you could absolutely do so! This is true no matter how quickly you would like to pay back your secured loan after you initially borrowed the money. However, of course, this is not as simple as it sounds.
More often than not, lending providers will want to know why you want to pay off your loan early, for example, you’re moving house.
Plus, they usually expect you to pay an early repayment charge. If your loan is less than £25,000, secured loan lenders are legally limited to only expect you to pay two months worth of interest. However, loans that are over £25,000 do not have a limit on how much interest lending providers can request you pay.
Saying that, if you want to pay off your secured loan a few years after you took it out, you will typically pay up to six months worth of interest fees.
Note: Some lending providers will allow you to pay up to 10% extra of your secured loan each year. Sometimes, this can actually be a better deal than the extra repayment fees attached to paying off your loan early. Maybe speak to your secured loan lender to see which option makes more financial sense for you.
What happens to my secured loan if I decide to move house?
If you have taken out a secured loan and used your property as collateral, you may be wondering whether you are able to sell your home and if so, how this will affect your secured loan.
The good news is, your secured loan should not prevent you from selling your home or at least putting it on the housing market. However, as you now know, the amount of money you are able to borrow with a secured loan depends on how much equity of your asset you own. Therefore, the amount of collateral that you own will affect your ability to get a new mortgage.
Plus, any money you do make from selling your home will first be used to pay off your current mortgage, then any other money you owe will be paid off (if there is any excess funds leftover, of course).
If you do manage to pay off your secured loan before you sell your house, you are far more likely to get a better deal on your new mortgage due to your reduced outgoings each month.
Usually, you will have to pay off your secured loan before you move into your new home, but some providers will let you transfer the money owed on your loan to your new property. Although, this is dependent on the equity involved in your new property. It is best to get advice from mortgage brokers if you are considering moving house when your current home is your collateral on your secured loan.
If you do need to pay off your secured loan before you move into your new property, there are a few ways you can do so, including:
- Using the takings from the sale of your home to pay off the remainder of your secured loan.
- Paying off your secured loan by taking out an unsecured loan.
- Using another type of credit to pay off your secured loan.
Of course, if you do need to pay off your secured loan before you move into your new property, it is best to check if your lending provider will charge you with any early repayment fees. If so, make sure you have the funds to pay off this additional fee as well as the remaining amount on your secured loan, too.
Is it a good idea to take out a secured loan?
You’re a clever person – you have found your way here after all! – so you probably know that within the world of finance, secured loans are often discouraged or expected to be the ‘last’ solution to your financial woes.
However, here at Finance Rate we understand that sometimes there is just no other option than a secured loan. Although, we would like to caveat that thinking with the hope that you have concrete repayment options in place that you can comfortably afford to pay back your secured loan. In an ideal world, it would be more than comfortably, just in case the interest rates fluctuate – which they likely will.
If you are considering a secured loan but are put off by the risks involved with this style of loan, do not worry. There are other options available and we will discuss these later.
Before you decide to take out a secured loan, we urge you to look over any of your financial documents and fully grasp the ins and outs of your finances so you are confident in any decisions you make regarding your financial future.
Secured loans: are there any alternatives to this type of loan?
You will be glad to hear that, yes, there are alternatives to secured loans if you decide it is not the right financial decision for you. However, the more money you want to borrow, the fewer options you have. Of course, if you do have a poor credit rating, unfortunately a secured loan may be your only option.
An unsecured loan
Perhaps the most obvious alternative to a secured loan is an unsecured one! Also known as a personal loan, this style of loan is extremely similar to secured loans except you do not have to use any collateral to secure the loan.
However, with unsecured loans you can usually only borrow smaller amounts of money – typically up to £25,000. Plus, the interest rates related to personal loans tend to be heavily impacted by your credit score. Therefore, if you have a poor credit rating, the more interest you will likely pay on your unsecured loan.
Note: Remember, you are also able to get unsecured loans with guarantors too. If you do have a bad credit rating, this may be another option if you do not want to use your property as an asset for a secured loan.
If you currently have a mortgage, remortgaging may be a solution to your financial woes. Remortgaging is the action of switching your current mortgage deal to a brand new one – whether that be increasing the amount of money or extending the length of your repayment.
Within this switching situation, you may be given the option to borrow additional funds against your property. However, it is important to know you may be charged money for remortgaging your property.
If you are considering remortgaging, it may be worth speaking to a mortgage adviser to get the best deal in terms of repayment time, rates, and additional charges.
0% credit cards
This alternative to a secured loan may be best for those who only need to borrow a small amount of money. Of course, most credit cards come with some level of interest attached, however, sometimes you are able to get credit cards with a 0% interest rate.
This means if you make a larger cost purchase, you could pay for it with the credit card and pay off the amount comfortably each month – with no added interest!
Typically, the 0% interest is only available for an introductory period. Therefore, if you do decide to take out a 0% interest credit card for extra money, you need to get the balance to zero before this introductory period comes to an end to prevent paying interest on your funds.
Transferring your credit cards
Some banks or building societies will allow you to transfer any credit card debt to a 0% interest credit card. This will allow you to pay off any money you owe without any additional interest. By removing this additional interest amount, you may be able to completely repay your debt.
You may have to pay some fees for moving your debt around, but some providers offer special rates for this service.
Note: Remember, a 0% interest credit card is only 0% for a limited amount of time. Therefore, it is best to figure out a plan that allows you to pay off your debt within this time period and avoid causing any potential tarnishes to your credit rating.
For more fuss-free financial advice, turn to Finance Rate
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