As the name suggests, a secured loan requires collateral as security, such as a house or high-value asset such as a car. If you have a less than perfect credit history but are a homeowner or feel comfortable putting valuable items on the line, you may find it easier to be accepted for a secured loan rather than an unsecured personal loan. A secured loan does come with some risk; if you default on payments, the lender can take possession of the assets you have provided as security.
Secured loans are taken out for a number of reasons. Secured loans tend to be for greater amounts, for projects such as a home extension or major renovations, capital to invest into a second property, university fees or funding for a business.
While a secured loan requires assets as security, an unsecured personal loan allows you to borrow money with less risk. For those with a poor credit score who need to borrow greater sums of money, secured loans may sometimes be the best option. With the knowledge that you are willing to put valuable possessions on the line, lenders can be assured that you are serious about keeping up with repayments. It may have risks involved, but a secured loan can allow you to borrow at a lower rate. Below are some of the pros and cons of secured vs unsecured loans:
Risks – you could lose your home if you default on payments
Bigger loan – the security of collateral can mean lenders will loan greater amounts
Preferential rates – lenders may feel more able to offer a better APR on this type of loan
Lower risk – if you default on this type of loan, you will affect your credit rating but you won’t risk losing your home.
Credit rating – your credit score will determine the terms and APR that you are offered.
Interest rates – unsecured loans can have a variable range of APR options.
There are several types of loans available on the market:
Homeowner loans – otherwise known as home equity loans, these allow you to take out a loan against the value of your home. Equity is the element of your home that you own. You can calculate this amount by subtracting your mortgage from the value of your home.
Bridging loans – a bridging loan allows you to borrow money to finish the purchase of a new property before you have sold your current home. Bridging loans are short term and almost invariably come with high interest rates.
Consolidate debt – a debt consolidation loan puts all your other debts into one bundle, meaning you have one easier to manage monthly payment. It is important that you check what the overall total cost will be, as a secured loan could end up being more expensive once the interest rate and longer repayment period is taken into account. In addition, changing unsecured debt into secured debt also puts you at risk of having your home or property repossessed if you can’t make payments.
The decision as to whether you want a fixed or variable rate will determine the type of secured loan you choose:
A fixed-rate loan means repayments will be charged at a fixed interest rate for a pre-determined period of time. When the fixed-rate term comes to an end, the rate will move to the lender’s SVR, or standard variable rate. This could mean your repayments go up or down.
A variable rate loan means the changes in the Bank of England base rate determine whether your repayments go up or down.
With a short-term fixed-rate product you will typically start on a discounted rate for a particular period, moving onto the variable rate when that term ends.
You will need to be eligible to apply in the first place, typically resident in the UK and be aged between 21 and 65 years old. You should also know how much you are looking to borrow; a secured loans comparison tool will help you work out interest rates and monthly repayments to ensure you only borrow what you can afford.
When you compare secured loans with personal loans, the risk involved is much greater. It is always worth considering your options carefully before committing to a decision.
As secured loans are for larger amounts you should always work out whether you can afford to make repayments. It is worth emphasising that by borrowing larger sums of money, you will pay more interest. The length of the term is also significant, if you take out a loan over a longer period of time, you’ll pay more interest over the agreed period.
When you compare secured loans with unsecured loans, you should carefully consider the implications of not being able to keep up with payments. You could lose your car or have your home repossessed. If you default on payments, some lenders may be quick to act to recoup the debt.
A good credit score is significant. The better your score, the more likely that you will be offered a preferential rate of interest.
Other significant factors include your income, how much equity you have in your home and any pre-existing loans. All of these will be taken into account by your lender.
If you do opt for a secured loan, it is important that you examine the total amount repayable plus the APRC (Annual Percentage Rate of Change), which is the rate of interest including the fees, costs and any introductory rates. In comparing loans, it’s useful to use the APRC to ensure a like-for-like comparison. Always ensure that you read any small print and have a good understanding of the consequences of any missed payments.
Citizens Advice can provide advice if you find you are struggling with your repayments or just need general guidance as to how to borrow responsibly.