What is a secured loan and how does it work?

A secured loan (also known as a ‘homeowner loan’) is tied to your property, so you must be a homeowner to apply for one. Using your property as collateral may allow you to borrow large sums of money, but it also means your home could be at risk if you fall behind with repayments.

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What is the difference between a secured and unsecured loan? 

The main difference between a secured and an unsecured loan is that a secured loan requires an asset to be used as collateral, whereas an unsecured loan doesn’t require any security.

Securing a loan to an asset reduces the level of risk for the lender (in terms of them getting their money back). As a result, you may be able to: 

  • borrow larger amounts - even if you have a less-than-perfect credit score
  • spread your repayments over a longer period
  • pay lower interest rates - compared to an unsecured loan

On the flip side, if you stop making your repayments, your lender has the right to repossess your property, to get back the money you owe them.

Unsecured loans (e.g., personal loans) don’t have this safety net. This can make this type of borrowing riskier from the lender’s point of view. So unsecured loans tend to be more expensive in terms of interest, and you normally need a good credit score to get accepted. If you can’t pay your credit score may be damaged, but your home will not be affected.

Read on for more information about the difference between secured and unsecured loans.

What are the types of secured loans? 

There are five main types of secured loans, and while they’re all similar (in that they all require collateral), they do have some differences. These generally centre around what purpose they’re used for. Understanding these differences will help you decide which one will work best for you.

1. Mortgages

Mortgages are a type of secured loan that most of us are familiar with – though we may not have previously realised it. As standard mortgages are tied to your property, they are classed as secured loans. However, they differ from other types of secured loans in that they have one specific purpose (to purchase a property) and the amount you can borrow can be exceptionally high – in some cases up to 90-95% of the value of the property to which they are secured.

2. Bridging loans

Bridging loans are a type of secured loan for short-term borrowing. They are usually used by people who want to buy their new home before the sale completes on their old one, and so they financially ‘bridge the gap’ between the purchase and sale. Bear in mind, bridging loans tend to come with high interest rates and extra charges, and they’re only intended as a stopgap.

3. Homeowner loans

Homeowner loans (sometimes called ‘second charge mortgages’, or simply ‘secured loans’) are the most common type of secured loan. Homeowner loans can only be tied to your property (not any other high value asset). They can be used on almost anything (not just home improvements).

Homeowner loans allow you to borrow large amounts from around £10,000 to £100,000 (depending on the lender and your individual circumstances). You repay this in monthly instalments including interest, over an agreed period.

4. Home improvement loans

Home improvement loans (also known as ‘renovation loans’) can be secured or unsecured. You may wish to get one of these loans to fund renovations if you haven’t got the money upfront. Again, if you’re applying for a secured home improvement loan, you must be a homeowner to be eligible.

5. Debt consolidation loans

As the name suggests, debt consolidation loans are specifically designed for repaying debts. These types of loans can be secured or unsecured. They allow you to combine all your debts into one, so you only have to think about one monthly repayment to one lender. This can make your debt repayments more manageable and affordable – if you can find a deal that charges you less interest.

Remember, if you consolidate your existing borrowing, you may be extending the term and increasing the amount you repay in total. 

What can a secured loan be used for? 

You can use a secured loan for almost anything you like, but people tend to put the money towards large-scale purchases or expensive projects such as: 

  • home improvements (e.g., a new kitchen or bathroom)
  • debt consolidation (where you combine multiple debts into one)

Secured loan lending criteria 

As with all types of lending, there are certain criteria you must fulfill to be approved – here’s a quick run through some of the main factors.

You must be a homeowner 

This one is a bit obvious, but important to specify nevertheless. To qualify for a secured loan, you must be a homeowner. This is because your property is the preferred security for secured loan lenders (and the only option if you’re going for a homeowner loan).

Note, if you own your home and are mortgage-free, you won’t be eligible for a secured loan, but you could consider remortgaging, where you borrow more against your property by switching to a new mortgage deal.

You must have equity in your property 

As well as being a homeowner, you must have equity in your home. Equity is the portion of your home that you own outright; it’s the amount you’re left with after you subtract your outstanding mortgage from the current value of your property.

The more of the property you own outright, the better your chances are of getting approved for a secured loan – and with competitive interest rates. This is because there’s less risk of you going into negative equity if house prices drop. (Negative equity is where you owe more than your house is worth). So, the more equity you have, the more comfortable the lender may feel in approving your loan application.

Having a good credit history is beneficial 

While secured loan lenders place less weight on your credit history than unsecured loan lenders (because they have the security of your home), having a good credit history is still beneficial and may boost your application. It shows lenders that you can manage your money well, which may reduce the risk to the lender further.

Why is secured loan affordability important? 

A secured loan is a big commitment – they can take years to fully repay so it’s important that you’re confident you’ll be able to repay it – both now and in the future.

Before deciding whether to lend to you, the lender will carry out affordability checks, where they look at your income and outgoings to assess whether you can afford the loan repayments. While it’s in their interests that you can, it’s important not to simply take their word for it, particularly when it comes to secured loans. 

Remember, in the worst-case scenario, the lenders have the right to recoup unpaid money by repossessing your home.

Use a loan repayment calculator  

It’s important to work out how much you can realistically afford to repay each month. We suggest you make a list of all your income and outgoings and work out exactly how much you have left after you’ve covered all your costs. If it’s tight, then you know that taking out a big loan is probably not the best idea. If there’s money left over, but you’re not sure it’s enough then use a loan repayment calculator.

This online tool is totally free to use and will help you work out how much you can afford to repay each month, so you don’t end up applying for a loan that you’ll find difficult to repay.

Can you pay off a secured loan early? 

Whether you can pay off a secured loan early depends on the agreement that you have with your lender. There are typically charges (known as ‘early repayment charges) for repaying secured loans early, because doing so means the lender loses out on interest.

Make sure you check the terms and conditions of the loan before agreeing to it, so you don’t get caught out with charges like this further down the line.

Secured Loans from £10,000 to £100,000

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We have found loans with rates from 2.10% to 25.34% APRC, which has allowed us to help customers with a range of credit profiles. Representative Example: If you borrow £20,000 over 10 years, initially on a fixed rate for 5 years at 5.35% and for the remaining 5 years on the lender's standard variable rate of 6.15%, you would make 60 monthly payments of £247.79 and 60 monthly payments of £252.62. The total amount of credit is £22,995; the total repayable would be £30,119.60 (this includes a Lender fee of £595, a Broker fee of £2,400 and a Lender exit fee of £95). The overall cost for comparison is 9.1% APRC representative. This means 51% or more of customers receive this rate or better.