Secured loans are becoming increasingly popular, particularly among those who own their own home and want to borrow a more substantial sum but may be struggling with an impaired credit rating. A secured loan is exactly as it sounds: you borrow money and the loan is secured against your property – so you have to be a homeowner.
In a bad credit situation secured loans generally come with lower interest rates than with sub-prime unsecured loans. That’s because the lender is exposing itself to less risk – it has the value of the home to fall back on in extreme circumstances. But this also means that tenants, people in social housing and many others in shared-ownership schemes are not eligible for secured loans.
Don’t confuse a mortgage with a secured loan: the former is known as a ‘first charge’ while the latter is a ‘second charge’ and this difference becomes relevant if the borrower becomes unable to repay the loans (see below).
What Secured Loans are available?
Secured loans are offered for variable interest rates and for variable amounts. Some lenders will offer loans of up to £25,000 while others offer much higher sums: often as much as £250,000. The main difference between a secured loan and a mortgage is that with a secured loan you usually have to have a certain amount of equity in your house (the difference between a home’s value and its outstanding mortgage balance). With a mortgage, you have to put down a deposit although this can be equity if you are selling your property and buying another one.
As with mortgages, the lender will conduct an affordability test to ensure that you can continue to make repayments in the future so you will need to be able to show that you can continue to cover the new loan, your mortgage repayments and any other outgoings.
Interest rates vary and tend to be lower for those borrowing higher amounts. The cheapest secured loan rates are currently between 8 and 10% while the more expensive can be anything up to 20%. You are more likely to have to pay a higher interest rate if you are borrowing a small amount or you have a poor credit record.
What if you can’t meet your Secured Loan repayments?
The big risk to be aware of is that if you default or otherwise fail to keep to the repayment schedule, the lender may be able to apply for a court order to take possession of your house and sell it to cover the outstanding amount that you owe.
When somebody gets into financial difficulty and the matter ends up in court, the mortgage issuer has the first call on the house while the secured loan lender has the second call. This is a legal arrangement and all charges are registered through the Land Registry. But while the priority with which delinquent loans against property are dealt with is different, the terms are usually exactly the same and are both regulated by the Financial Conduct Authority.
Are there any other pitfalls?
While you will often be able to borrow money for a fixed rate (which is usually for a set number of years), with most secured loans, you will find that interest rates are typically variable, which may cause you difficulties if rates rise significantly in the future. That means that if you also have a variable rate loan, you could struggle if the current era of record low interest rates suddenly comes to an end.
That might sound like an extreme scenario but it’s worth remembering that you are exposing yourself to a higher risk with a secured loan than an unsecured one. When deciding if you want a secured loan, there are some important questions you should ask yourself:
How long will I have to repay?
Secured loans come with repayment terms of between five and 25 years. Some do have longer schedules, though, with a few lenders happy to consider repayments over 30-35 years.
Are there other fees?
In many cases, yes. Most lenders will be clear about how much they charge and what fees and administration charges there are. But some continue to borrow these conditions in the small print of the terms and conditions. Watch out for arrangement fees, other admin charges and, particularly, early redemption fees. If your circumstances suddenly change for the better and you are in a position to pay off your loan early, then redemption penalties will mean that you will have to find extra money to pay off the balance and close the loan.
Oliver Jones has written for Solution Loans since 2015. His passion for personal finance comes through in the 150+ blog posts he's written since that time. His talent for explaining all things money means he's covered topics as diverse as...Read about Oliver Jones
We use cookies to make your experience on our site even better. They also help us to understand how you use our site. By clicking 'Accept All' you're agreeing to our use of cookies. You can change your cookie preferences by choosing 'Manage Settings' and if you want to know more, you can read our cookie policy.
This website uses cookies to improve your experience while you navigate through the website. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may affect your browsing experience.
Necessary cookies are absolutely essential for the website to function properly. These cookies ensure basic functionalities and security features of the website, anonymously.
Cookie
Duration
Description
cookielawinfo-checkbox-analytics
11 months
This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Analytics".
cookielawinfo-checkbox-functional
11 months
The cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional".
cookielawinfo-checkbox-necessary
11 months
This cookie is set by GDPR Cookie Consent plugin. The cookies is used to store the user consent for the cookies in the category "Necessary".
cookielawinfo-checkbox-others
11 months
This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Other.
cookielawinfo-checkbox-performance
11 months
This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Performance".
viewed_cookie_policy
11 months
The cookie is set by the GDPR Cookie Consent plugin and is used to store whether or not user has consented to the use of cookies. It does not store any personal data.
Functional cookies help to perform certain functionalities like sharing the content of the website on social media platforms, collect feedbacks, and other third-party features.
Performance cookies are used to understand and analyze the key performance indexes of the website which helps in delivering a better user experience for the visitors.
Analytical cookies are used to understand how visitors interact with the website. These cookies help provide information on metrics the number of visitors, bounce rate, traffic source, etc.
Advertisement cookies are used to provide visitors with relevant ads and marketing campaigns. These cookies track visitors across websites and collect information to provide customized ads.