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What is a secured loan?

A secured loan is money you borrow that is ‘secured’ against your property. This means the asset can be used to recover the debt if you don’t meet your repayments. These types of loans are only available to homeowners, so this isn’t an option if you rent your home.

7 min read
Couple looking at loans

If you’re thinking about taking out a secured loan now or in the near future, make sure you get to grips with all the important bits first. This is our guide on everything you need to know.

How does a secured loan work?

This type of loan is attached to something you own, usually your home. Because lenders have this added layer of security, you may be offered lower interest rates and be able to borrow more than with a personal loan.

However, one incredibly important factor to bear in mind is that your property could be at risk if you’re unable to meet your monthly payments, so you should only consider taking out this type of loan if you’re confident in your ability to repay it - both now and in the future.

Once you’ve applied and been accepted, you’ll have to repay the amount you borrowed with set, monthly repayments, which will cover the sum itself plus the cost of borrowing (i.e. the interest).

How to apply for a secured loan

Each provider will have their own application process, but there are a few steps you should follow before you make any credit enquiries.

Work out what you can afford to borrow

How much you can borrow will depend on a few things, like your personal circumstances, credit score and how much equity you have in your home. However, just because you’re offered a certain amount, doesn’t mean you should necessarily take it.

Before you go ahead, do some number-crunching to see how much you can afford to repay each month without spreading yourself too thin. When you’re doing this, try to factor in the unexpected too. For example, if you can only just afford the instalments as is, how would you cope if an emergency repair cropped up?

Check your credit history

The health of this will contribute to whether you’re accepted, how much you’re offered, and what interest rate you’re given.

So, before you start filling in any applications, make sure now’s a good time for you to apply. It might be worth holding off if:

  • There are mistakes on your report
  • You recently missed a credit payment
  • You recently took out another line of credit
  • You’ve made lots of rejected applications in a short space of time
  • You have a CCJ

Do your research

Each complete, hard credit search leaves a mark on your file and lots of applications doesn’t look great to lenders. It can make you seem desperate to access cash.

To increase your odds of being accepted and secure the best deal possible, take some time to shop around. Go to lenders directly, use comparison sites and look for creditors who:

  1. Meet your requirements
  2. Are likely to lend to you, and
  3. Offer competitive interest rates

Tip: Lots of lenders let you see if you’re likely to be accepted before you apply without impacting your credit score, so make the most of this.

Make your application

If you’ve followed steps one to three, you should be ready to start your application. This bit will vary from lender to lender, but some things you can expect as standard are:

  • For the application to be completed both online and over the phone
  • To be asked for personal details like your name, date of birth, address, employment status and income
  • And to give details about your property and how much equity you have in it

It’s worth noting, if you own a property jointly, you’ll have to apply for the loan in both names. If one of you is on board but the other isn’t, lenders won’t accept your application.

How much can I borrow?

This is another area that’ll differ depending on who you apply with. Some lenders have limits as high as £1-million, others cap at £100,000. There really is no single answer.

Just because a lender says they offer up to £100,000, it doesn’t always mean that’s what you’ll be given. As we touched on earlier, things like your employment status and income will all impact what you’re offered. Here are some areas which will affect the amount you can borrow:

  • Credit history: Generally, the better this is the more money you’ll have access to. This is because lenders feel more confident they’ll get their money back on time and in full.

  • Employment status: Because of fluctuating incomes it can be trickier to secure credit if you’re self-employed - being unemployed can also put a spanner in the works.

  • Income: The more you earn, the more money you have spare to put towards your loan repayments, which fills lenders with more confidence.

  • Homeownership: If you don’t own your property, you won’t be eligible for a secured loan, full stop. If you do though, how much equity you have in your home can also impact how much you’re offered. Equity is the amount of money you are left with after you deduct your mortgage from your current house valuation. Usually, the more equity you have, the more you can borrow.

What can a secured loan be used for?

Some common uses include:

  • Home improvement projects
  • Home extensions
  • Debt consolidation

There are a couple of things you should never use it for though, like gambling and anything illegal.

Applying for a secured loan as a long-term solution to help ends meet is also a big no-no. Loans shouldn’t be used as a tool to cover essential costs - like groceries, bills or mortgage payments - because it can lead to an unhealthy and unmanageable spiral of debt.

Can I get a secured loan with bad credit?

Yes, you can. Each lender uses their own criteria, and although there’s no denying a bad credit score can make it more difficult to be accepted and can affect the interest rate you’re offered, it absolutely doesn’t mean you’ve hit the end of the road.

Here are some things you will need to consider if you have bad credit and you’re applying for a loan:

  1. Because lenders will be less certain they’ll get their money back, you may find it trickier to be accepted in the first place. To avoid damaging your credit history further make sure you don’t fall into the trap of making lots of repeated applications and only go ahead if you know there’s a good chance you’ll be accepted.
  2. If you are accepted, you might find the interest you’re offered is higher than expected. Higher interest rates reflect the greater risk lenders are taking and make the cost of borrowing more expensive, so factor this in when making any decisions.

If you can afford to wait, it might be best to put your plans on hold. Think about improving your credit score in the meantime, and then apply further down the line - when you’ve got a better chance of being accepted with lower interest rates.

What’s the difference between a secured and unsecured loan?

Like the name suggests, a secured loan is attached to an asset, usually your home, and an unsecured loan isn’t.

When you take out a secured loan you’re agreeing to the possibility of the lender repossessing your home in the future if you don’t stick to the terms of the arrangement.

With an unsecured loan you don’t have that hanging over your head. Lenders can’t automatically come after your assets, so in that sense, it can be a safer borrowing option.

Here’s how a secured loan might be a little different to an unsecured personal loan:

  • You could be accepted with a lower credit score
  • And you could borrow a higher amount of money

Aside from this, both types of loan are very similar. They both:

  • Have a set loan term
  • Require monthly repayments
  • Charge interest
  • And both show on your credit report

How long does it take to get a secured loan?

Again, this depends on who your lender is, as well as how quickly you complete and send back your paperwork, but it can take about 3-6 weeks.

The quicker you give the lender what they need, the sooner you’ll get your loan - but remember not to rush this bit. Incomplete information can set you back and inaccurate details could flag up as credit fraud.

Taking out a secured loan is a lengthier process than taking out a personal loan, as it is secured against your property, so there’s more legal paperwork involved.

To give you an idea of why the application can take longer, these are the steps taken when you apply:

  1. You have to fill out relevant forms and provide requested paperwork
  2. A valuation of your home is ordered and carried out
  3. The lender awaits confirmation of your property’s valuation
  4. An agreement is drawn up for you and the lender to sign
  5. The funds are transferred to you

What documents do I need for a secured loan?

First things first, as with any type of lending, you’ll need to prove you are who you say you are and you live where you say you live. Making sure you’re on the electoral roll will help with the former and something like a utility bill (with your name and address on) will demonstrate the latter.

The documents needed to process your loan depend on your circumstances and are reviewed on a case-by-case basis. They may include (but are not limited to):

  • Your application form
  • Bank statements
  • Proof of income and expenditure

Now that you’re prepared for your application and understand the process, check your eligibility for a secured loan.