Written by Robert Bester, Consumer Finance Expert Robert has been a writer for six years, specialising in consumer finance and the UK lending market. Concentrating on consumer credit products, Robert writes informative articles that help customers manage their personal finances efficiently.
11th January 2021
3 minute read
If you’ve found yourself in a bit of financial difficulty or have your sights set on a big buy, you may be wondering about a secured loan
Before you get over-excited and sign up for the first one you can find, take a minute to demystify and learn the facts about secured loans with our guide below.
What is a Secured Loan?
A secured loan is covered – or secured – by an asset owned by the borrower. This gives the lender extra security to know that there will be a way to pay back the loan should you default on payments.
- Are often used to borrow large sums of money, usually over £10,000, although they can be used to borrow as little as £3,000.
- Can have a fixed or variable rate of interest
- Can have a fixed or variable pay-back time
- Are less risky for lenders
A secured loan allows you to borrow a fixed or variable sum. They are often used for the likes of home extensions, or home improvements. You then pay this back gradually, which can mean lower monthly payments than many other loans. How much you can borrow will depend on your individual circumstances, but many providers offer loans for up to £35,000, over periods of five to 20 years
Secured loans tend to offer lower interest rates because they’re secured against an asset, such as your property. Of course, this means you risk losing your home if you don’t keep up with your repayments, which isn’t an attractive prospect for anyone and is something that deserves serious consideration.
First and second charge mortgages
Some secured loans can be classified as first or second charge mortgage. This refers to the asset you use to secure it with. If you have a mortgage and use your house as security for a loan, that loan will be second charge. If you own your home outright and use it as security on a loan then it will be classed as a first charge loan. For most people your house is the biggest asset you’ll ever own, so you might come across the terms “first or second charge loan” and “first or second charge mortgage”, but they both refer to the same thing.
Check Interest Rates
Many secured loans come with variable interest rates, which means the amount you pay could change. This has the potential to put a real spanner into your carefully constructed budget. If you choose a loan with variable rates, you’ll need to be confident you could handle a rise in repayments.
You should also be aware of fees that could add a considerable amount to the overall fee you pay back. Many lenders charge an arrangement fee for the setting up of the loan. They can also ask for early redemption fees if you settle the loan early or make overpayments. Lastly, the broker you use may also apply a broker fee.
Compare Secured Loans
People often choose a secured loan when a credit card or unsecured loan isn’t an option. This might be because they don’t have a great credit rating, or it’s not possible to use a credit card for what they are buying.
If you’ve decided a secured loan is the right choice for you, you’ll want to search for the very best terms. When you’re shopping for a loan, the representative APRC (Annual Percentage Rate of Charge) is the total cost of the credit to the consumer. Use this when looking at quotes from different lenders as they all have to calculate it in the same way, so it’s a good way to compare. The calculation assumes that you keep the same mortgage and provider for the entire term though and that the rates shown don’t change even if described as variable.
Be sure to shop around to find the deal best for you. Using the APRC, the duration of the loan and the total amount you’d have to pay back.
Secured v Unsecured Loan
Secured or unsecured loan…that is the question.
Unsecured loans aren’t always available for things like consolidating debts, and secured loans can sometimes be a smart tool in these type of circumstances. If you’ve previously been refused an unsecured loan and are searching for a secured loan as a result, it’s always worth checking your credit report for factors that could be holding you back before you apply for a secured loan. There may be some errors on there you could have removed or little things that can be easily fixed.
It’s been said before but just as a quick reminder, you definitely shouldn’t take out a secured loan if you think you may struggle to meet repayments. Borrowing over a longer period also means you’ll pay more back in total because of interest mounting over time.