When would I consider a secured loan?
You should only consider a secured loan if you have an asset to secure it against (such as your home), and you’re sure you can meet your monthly repayments on time and in full each month. Bear in mind that if you consolidate your existing borrowing, you may be extending the term and increasing the amount you repay in total.
Other factors may also apply, for example if:
- you have less-than-perfect credit (if you have bad credit you may find it easier to get a secured loan than an unsecured loan as your asset offsets some of the risk to the lender)
- you need to borrow a large amount of cash (between around from £10,000 to £500,000)
- you are happy to wait three to four weeks or so for the money to come through (as secured loans often take longer to process than unsecured loans due to the paperwork involved)
- you don’t have any savings you could use instead
- you are comfortable using an asset as collateral and you are aware of the risks involved
Can I get a secured loan with no equity?
No, you can’t get a secured loan with no equity – even if you own your own home and have a mortgage. Having sufficient equity in your property is a key requirement for a secured loan, as the loan is tied to a portion of your property that you own outright.
To work out how much equity you have, you need to calculate the difference between the outstanding balance on your mortgage (and any secured loans) and the current market value of your property.
For example, if you have a £100,000 outstanding mortgage balance on a house worth £200,000, your equity is £100,000 (50% of the current value). The more equity you have, the more you may be able to borrow against it, as there’s less risk of you going into negative equity (where you owe more than your house is worth).
If you are a homeowner without sufficient equity, or a tenant with no property, there are other forms of borrowing you could consider instead. Depending on your needs, a personal loan, credit card, or overdraft may be suitable.
What do lenders accept as collateral?
In some circumstances, it is possible to secure a loan against an asset other than a home. The asset would need to be worth approximately the same as the total cost of the loan, just in case you fail to meet the repayments.
Typical assets may include:
- Property – this is the most common form of collateral and includes houses, flats and sometimes even commercial property.
- Car – a logbook loan is secured against your car. If you fail to repay the loan, the lender could repossess your car. Be aware, these types of loans usually apply high interest rates.
- Savings – some lenders may accept savings as collateral if they are extensive enough to cover the loan. However, if you have savings, it may make more sense to use them instead of taking out a secured loan (as this will save you in interest and charges).
Why do some loans require collateral?
Secured loans require collateral because it gives the lender assurance that they’ll be able to claim back funds in the event of non-payment, as they could repossess the asset.
This safety net reduces the risk to the lender and enables them to offer larger sums of money with lower interest rates compared to unsecured loans. But because of the potential risk to your property, it’s very important that you are certain you can manage the repayments on a homeowner loan before you take one out.
Bear in mind, if your home is repossessed, your mortgage provider will recover their costs first, then any remaining funds will go towards paying your secured loan. If the sale of the property does not raise what’s needed to cover both amounts, you will remain in debt and you may still be charged interest on this shortfall.
What else do I need for a secured loan?
As well as having sufficient collateral, lenders will also take other factors into consideration when you apply. Each lender will follow their own criteria, but they tend to look at your:
- Proof of identity – lenders will usually check that you’re registered on the electoral roll as a way of checking the stability of your address and confirming you are who you say you are
- Affordability - the lender will carry out an affordability check on your income and outgoings to make sure you can manage the monthly loan repayments
- Credit history - negative footprints on your credit history, like a CCJ, may concern lenders - though they focus less on this than they would if you were applying for an unsecured loan
Tip: You can check your credit report for free with Experian, TransUnion and Equifax. You can also check your Equifax report for free (for life) through our member-only platform, CredAbility. This will give you a good idea of what lenders can see when you apply.
What is an unencumbered mortgage?
An unencumbered mortgage is a form of borrowing that’s taken out against a property that you own outright. For instance, if you have paid off your original mortgage in full and wish to borrow additional funds, using the property as collateral.
What are the alternatives to a secured loan?
Taking out a secured loan is a huge financial decision. It’s important that you consider the alternatives to a secured loan in order to make the best choice for you. Other options you may want to look into include:
1. Personal loan
A personal loan doesn’t require any collateral as it’s an unsecured form of borrowing. So, you don’t have to worry about losing your home if you don’t pay. However, missed payments will affect your credit score. Plus, interest rates can be higher compared to a secured loan, and you may be offered a smaller loan, due to the higher level of risk to the lender.
2. Credit card or overdraft
If you don’t need to borrow a huge amount, you may be able to put it on a credit card or use your overdraft instead of taking out a loan. Just be aware that some cards have money transfer fees and most credit cards and overdrafts apply interest.
3. Loan from friends and family
If you can borrow from friends or family, you won’t need to put up an asset as collateral or pay any interest or charges. But remember, if you don’t pay them back on time, every time, you could damage your relationship with them irrevocably.
If you are a homeowner, you could weigh up the pros and cons of getting a secured loan against remortgaging, to find out which is the best option for you. Remortgaging involves switching your current mortgage to a new one (using the same provider or a different one). You could consider borrowing more against your mortgage in this way, to free up some cash.
Mortgages tend to have lower interest rates than both secured and unsecured loans, so remortgaging may work out cheaper. But this isn’t always the case, and early repayment charges may apply if you switch before your current mortgage deal ends.
Bear in mind, with both remortgaging and secured loans, the borrowing is secured against your property. So, you need to consider your affordability carefully. It may be worth speaking to a qualified mortgage adviser before going ahead.
Read on to find out more about the difference between remortgaging and secured loans.
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Secured loans are secured against your property.