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What is a Secured Loan?

12th May 2022

By Karina Nowicka

What is a Secured Loan?

Check out this quick Secured Loan Video explainer

A secured loan (sometimes also referred to as a homeowner loan or second-charge mortgage) can allow you to borrow money while using your personal assets as security. Normally your home or bricks and mortar property. However, theoretically, a secured loan can use other security such as property or a car. This is known as a collateral. This means that the lender can sell your assets if you cannot keep up with the repayments, in order to get their money back.

Secured loans are usually used by individuals who need to borrow a larger amount of money, borrow money to pay back over a longer term, or people who cannot get approved for an unsecured loan. Unlike secured loans, an unsecured loan does not need anything valuable for security.

What can Secured Loans be used for?

Secured loans help people with assets use them as a helpful finance tool. These could be used for big home improvements, funding a business, weddings or financing a car. They’re essentially there for anything you might need additional funds for, if you are struggling to get a personal loan (unsecured loan).

They are also generally easier to get, as you are using your asset as a guarantee for payments. You will look a lot more reliable to lenders and they won’t rely as much on your credit score to make judgement, even if it is quite poor. In summary, you will be a lot more likely to get accepted for this loan if you have been struggling with any other types of credits. However, if you are unable to keep up with the repayments, your asset is then at risk of being taken by the lender.

What can be used as an asset?

Anything of value could be used as an asset. This can range from equity you have in a property, to a car or expensive jewellery. Each lender is different, and so certain lenders may only accept certain types of asset as collateral. This means it is important to talk to a financial advisor who can help you decide what could work best for you.

What happens if you cannot keep up with the repayments?

Similar to most loans, you will be obligated to make monthly repayments in order to pay off what you have borrowed, including interest. The interest rate is what determines your monthly payments. 

If for any reason you fail to make the repayments, the lender then has a lawful right to sell your home, or repossess anything used as collateral. It’s very important to make those repayments in full and on time, as you are at risk of defacing your credit score and even losing your home. 

The monthly instalments are usually set up by direct debit so you never miss a payment. It’s also quite important to always double check you have sufficient funds in your account, so sticking to a budget is a helpful tool.

How much does a secured loan cost?

This all depends on multiple different key factors, as every loan is different. There are many things to consider before applying for a secured loan, such as making sure you will be able to make the repayments on time even if your financial situation were to change. With that being said, it’s quite near impossible to say specifically, how much a secured loan may cost. Here are some of the subjects that may affect it:

  • Amount of money you borrow. The more money you borrow, the more you will be paying back.
  • The asset you offer as security. You home is a solid and reliable asset a lender can take security – so the rates are very competitive. Your gold watch is a more movable asset so expect the lender to want to take possession of it for the term of the loan and charge higher interest rates
  • Interest Rates. This is the main element that determines how much your monthly payment will be. Most lenders will offer lower interest rates for long-term larger loans secured on solid salable assets. One thing to keep in mind is that your credit score will often have an impact on the rate of interest in most loans.
  • The length of the term. Your monthly payments could be more affordable if you are borrowing over a longer period. However, borrowing for longer means you will be paying more in interest.
  • Loan fees. These are additional fees you are paying to your lender for setting up a loan.

What are the advantages of getting a secured loan?

There are multiple advantages. Here are some of the main reasons a secured loan may be beneficial for you:

  • You could be entitled to a larger borrowing amount. Since your loan is secured by something very valuable such as your home or car, you may be able to borrow a bigger amount of money with a lower interest rate. Lenders tend to lend more money to individuals who use their homes as collateral. This is because it is easier to then repossess and sell when the borrower cannot make the repayments.
  • Extra time to payback. Secured loans typically give you the option to pay back over a longer duration of time than unsecured loans. Although this does mean you may pay more in interest, your overall monthly payments can be lower.
  • Helps you build up your credit score. Borrowing over a longer periods makes the repayments more affordable. So, if you make all your payments on time, or pay off any debts without any problems, this causes your credit score to build up and improve. This can be a helpful tool in the future as it opens up more credit options and better interest rates. 
  • Easier to get accepted. If you have bad credit or are self-employed, it can be much less challenging to be accepted for a secured loan than an unsecured loan.

So what are the disadvantages of getting a secured loan?

Although a secured loan may have a good few bonuses, there are also a number of things to be wary of. Here are some of the disadvantages of taking out a secured loan:

  • Your home may be at risk. This is probably the main disadvantage of a secured loan. If the loan is secured against your home, and you are unable to make the repayments, the lender has the legal right to repossess the property. 
  • Longer repayment terms could mean you are paying more. Paying off your loan in a longer period of time means your monthly payments will be lower. However, the longer the term of the loan, the more interest you typically pay.
  • Arrangement fees. Some lenders and brokers may charge extra fees for arranging a loan. This is why it’s always best to compare loans before applying.
  • Early repayment charges. If you wished to clear your loan earlier than agreed, there may be an early repayment charge.

In summary, before applying for a secured loan, make sure you absolutely need the extra finances. It’s important to do so, as you will be paying for it back over a long period of time, as well as putting your home or other valuable assets at risk of repossession. Ask yourself if this is the right solution for you and your circumstances. Speak to your financial adviser, broker or directly with our advisors here at Promise Money to help and guide you in the right direction. 

Talk to a Promise Money adviser for more details


Pages which others have found useful…

    Find a secured loan

    Enter some details and we'll estimate your repayments on our popular loan plans – this will NOT affect your credit rating.

    How much you would like to borrow?

    £

    Type in the box for larger amounts

    For how long?

    yrs

    Use the slider or type into the box

    What best describes your credit rating?

    Perfect: In the last year you have no mortgage arrears, CCJs or defaults. Your credit score is high.

    Your repayments are estimated at

    £249.51 per month


    Secured Loan examples above are based on total borrowing of between 50-75% of the value of your property. Any lender / broker fees can be added to your loan which will increase the repayments and total amount repayable. Discuss this with your Promise adviser.
    REPRESENTATIVE EXAMPLE FOR PERFECT CREDIT HISTORY (with all set up fees added to the loan) – £63,000 over 228 months at an APRC of 4.2% and an annual interest rate of 3.47% (variable) would be £398.62 per month, total charge for credit £24,400.36, total payable £90,885.36. This figure includes a Promise fee of £2,690. Actual repayments depend on your circumstances.

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