Understanding Secured Loans for Beginners

Borrowing a secured loan against your home is always a risky proposition, because, if you fail to make the repayments, your property could be repossessed. However, there is a time and a place for secured loans, and in this guide we aim to explain exactly when and where that might be. 

What is a secured loan?

A secured loan is a product only available to homeowners or mortgage holders, as the lender uses the property as security against the loan. If you can’t repay the loan, the lender will sell your property to get the money back.

Most personal loans from a bank or a building society are not secured in this way, but it is increasingly becoming common for those in financial difficulty to use a secured loan to help them get back on track.   

Why would you choose a secured loan over an unsecured loan?

Clearly, a loan where your home isn’t at risk is preferable to one where it is. However, secured loans do have some advantages, such as:

  • They are easier to obtain – Unsecured loans tend to be cheaper, but those with poor credit scores will usually have their loan application refused. Secured loans allow lenders to consider those with an adverse credit rating because they know, one way or another, they will get their money back. 
  • You can borrow more – The most you can borrow on an unsecured loan is approximately £30,000, while some secured lenders will let you borrow up to £75,000.
  • The debt is spread over a longer period – Due to the larger amounts of money involved and the significant set up costs, secured lenders prefer the loan to be repaid over a longer period of time, typically 5 to 20 years. Of course, borrowing over a longer period does increase the interest repayments, but it also reduces the monthly repayment. 

How is interest charged on secured loans?

Typically, the interest charged on unsecured loans is fixed for the whole period of the loan. The interest charged on secured loans is usually variable, and can shift with the changing tides of the UK base rate, or in line with the lender’s standard variable rate.

Whenever you’re considering a long term loan with variable interest rates, it’s essential you think carefully about whether you’d be able to afford the repayments if interest rates were to rise. If there’s any doubt in your mind, a variable rate secured loan is not appropriate for you. There are some lenders that offer fixed rate secured loans, although the fixed rate will usually only last for a limited period. You should also check the fees and charges, as there can be penalties for paying off your debt early.

How much does a secured loan cost?

As with any loan, there are a number of factors that determine the rate you will be offered. The duration of the loan, your credit score and the amount of equity in your home will all be taken into account. As mentioned previously, secured loans do present a viable option for those with poor credit scores, as the security provided overrides the risk. However, people with poor credit can still expect to pay more for a secured loan.

Can you repay secured loans early?

It is possible to repay secured loans early, but it can be costly. Secured loans are vey limited in their flexibility, so even if you have a sudden cash injection from another source, you may not be able to repay your debt early without attracting a hefty fee.

What happens if you miss a payment?

Losing your home is a very real risk with a secured loan. However, generally speaking, it is less profitable for lenders to go to the trouble of repossessing your home, rather than giving you a little bit of extra time if you’re struggling to make the repayments. If you are worried about missing a payment, make sure you contact the lender immediately to explain your situation and possibly renegotiate the payment schedule.

If you miss a repayment, there will also be a negative impact on your credit score. Some lenders will also charge you for producing letters to inform you of arrears on the loan, and this can be added to the cost of your loan with interest.

How can we help?

At The Mortgage Centres, we take the time to discuss your situation and help you consider alternatives to a secured loan if other options exist. We then research the whole of the market on your behalf, including mainstream and more specialist lenders, to help you find the right deal.