Secured Loans
Secured loans can be a good way to borrow money as they incur cheaper interest rates than standard unsecured loans. However, before committing to one its essential you are aware of both the risks and benefits.
Get in touch for a free initial, no-obligation discussion about your mortgage situation.
What is a secured loan and how can it help me?
A secured loan is where you use your property as security against the money you borrow. Using the asset value of your house to show you are not a high risk makes it more ‘secure’ for the lender.
This means that interest rates are usually lower than those for an unsecured loan. Therefore, you should have less hurdles to negotiate on the way to getting a loan.
However, taking out a secured loan against your home is always a risky proposition. Because, if you fail to make the repayments, your property could be repossessed.
Most personal loans from a bank or a building society are not secured in this way. But, it’s becoming increasingly common for those in financial difficulty to use a secured loan to help them get back on track.
Specialist Mortgages with Secured Loans
Why would you choose a secured loan over an unsecured loan?
You may think that a loan where your home isn’t at risk is preferable to one where it is. However, secured loans do have some advantages, such as:
- They are easier to obtain. Unsecured loans tend to be cheaper, but those with poor credit scores will usually have their loan application refused. Secured loans allow lenders to consider those with an adverse credit rating. This is because they know, one way or another, they will get their money back.
- You can borrow more. The most you can borrow on an unsecured loan is approximately £30,000. While some secured lenders will let you borrow up to £75,000.
- The debt is spread over a longer period. Due to the larger amounts of money involved and the significant set-up costs, secured lenders prefer the loan to be repaid over a longer period of time, typically 5 to 20 years. Of course, borrowing over a longer period does increase the interest repayments, but it also reduces the monthly repayment.
What can you use a secured loan for?
In many cases a lender will require you to tell them what you intend to use the loan for. This helps them to carry out risk and affordability assessments before they accept your application.
Being open with your lender can be very beneficial, as it will help them to understand your needs. This can then lead to a smoother application process and more suitable loan terms.
From our experience, two of the most common things secured loans are used for are home improvements and to consolidate debt.
If you are looking to improve your home with an extension, conservatory or through general repairs, a secured loan can be an ideal.
In recent years, due to low interest rates, many borrowers have opted to remain on the low rate that they have. Whereas before they may have chosen to release equity for home improvements by remortgaging.
If you want to find out more about how you can use a secured loan for home improvements, take a look at our in-depth guide.
For many, it can be cost effective to consolidate a group of debts into a single, more manageable payment.
It is necessary, however, to take great care to ensure that this is the correct course of action.
Debts such as credit cards, personal loans, store cards and more are short-term debts. So, if you consolidate these with a secured loan the term will increase. In turn, it could increase the amount of interest you pay.
Secured Loan topics
A secured loan is where you use your property as security against the money you borrow – using the asset value of your house to show you are not a high risk, making it more secure for the lender.
Calculators
These calculators are great for getting a quick guide, but if you want a completely accurate assessment then you should talk to one of our professional advisors.
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Interest rates on secured loans
Because the lender has security over your property, the rates for secured loans can be competitive. Therefore, you should ensure you take your time before committing to a specific loan.
Secured loan lenders will consider various factors when determining the rate of interest you will pay. However, each lender will assess your application differently, meaning that where one lender might offer you a product, another may not.
Typically, lenders will look at the following:
- Your age
- Your income and expenditure
- How much equity you have in your property
- Your credit situation
- Affordability
- The condition of your property
It can be hard to give a list of the ‘best’ interest rates on secured loans, as the market fluctuates often. On top of this, each application will be different, so what rate you’re offered may not be the same as the next person.
If you want to see what rates your loan might incur, get in touch today. Our expert advisors will listen to your situation and recommend the best route to take.
Typically, the interest on unsecured loans is fixed for the whole period of the loan.
The interest charged on a secured loan is usually variable. This means it can shift in line with the UK base rate, or with the lender’s standard variable rate.
Whenever you’re considering a loan with variable interest rates, it’s essential you think about whether you’d be able to afford the repayments if interest rates were to rise.
If there’s any doubt in your mind, a variable rate secured loan is not appropriate for you. There are some lenders that offer fixed rate secured loans, although the fixed rate will usually only last for a limited period.
You should also check the fees and charges, as there can be penalties for paying off your debt early.
Can you repay a secured loan early?
It is possible to repay secured loans early, but it can be costly.
Secured loans are very limited in their flexibility, so even if you have a sudden cash injection from another source, you may not be able to repay your debt early.
And if you are allowed to pay back your loan amount early, it may attract an early repayment charge.
Frequently asked questions
Due to the number of lenders within the secured loan market, it’s possible to obtain a loan even if you have bad credit.
Whether this encompasses defaults, CCJ’s or bankruptcy, we may be able to help.
Losing your home is a very real risk with a secured loan.
However, generally speaking, it’s less profitable for lenders to go to the trouble of repossessing your home. Rather, they will give you a little bit of extra time if you’re struggling to make the repayments.
If you are worried about missing a payment, make sure you contact the lender immediately to explain your situation. This way you can possibly renegotiate the payment schedule.
If you miss a repayment, there will also be a negative impact on your credit score. Some lenders will also charge you for producing letters to inform you of arrears on the loan. This cost can be added to the cost of your loan with interest.
Phil Scott
Director
About the author
Phil has worked in the financial services industry since 1992, having started with a large insurance company. He went self employed in 1996 as an Independent Financial Adviser before setting up his first company, Needham Market Home Financial in 1999.
After four years, he decided to concentrate solely on mortgages and related insurances, and The Mortgage Centres was born. Since then, Phil has been influential in the opening of several new offices as the business continues to grow.
Qualifications
Financial Planning Certificate: 1,2 & 3
Year Attained: 1992
Certificate in Mortgage Advice and Practice (CEMAP)
Year Attained: 2001
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