Applying for a secured loan
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.
25th October 2021
4 minute read
The decision to take out a secured loan normally means that you have a requirement to borrow a lot of money over a long period, and are willing to use a valuable asset such as your house as collateral.
You will need to consider the following when searching for a secured loan:
- Loan amount
- Loan term
- Interest rate
We’ve put together a short guide that details everything you need to know when applying for a secured loan; especially useful if you’ve never had to take out a personal loan before. Read on to find out exactly what you should be looking for when browsing for loans.
Before applying for a loan
1. Credit report
First and foremost, make sure you are up-to-date with your credit report. This is important to see the likelihood of whether you would be accepted for a loan when you apply. It also allows you to rectify certain issues with your credit file and take steps to improve your credit score.
2. Check your eligibility
You can also confirm your eligibility by using our free online comparison tool, moneymatcher. This will allow you to see which loans would be most suited to your circumstances, without damaging your credit score.
3. Look over your current finances
Once you have checked your credit report and your eligibility, it’s worth going over your finances. This means checking how much you earn on a monthly basis, totting up your expenses and finding out how much spare cash you have available.
If you don’t have anything spare, think about trying to cut back your expenses by saving money. If you are unable to free up any spare cash, a secured loan might not be the right option for you.
4. Long-term financial projections
Since a secured loan is taken out over such a long time, and they are high-risk, it is worth being realistic about your current income and how you see it changing during the lifetime of the loan.
We’re not saying you need to predict the future, but you need to be as sure as possible that you will receive a monthly income to cover repayments. If you’re a freelance worker, or if you have not been in a new job or career for more than 6 months, you’re less likely to have a consistent amount of money available every month, so a loan might not be ideal for you.
5. Ask yourself: are you comfortable risking your home?
Even if you’re 100% sure that you will be able to make repayments every month, with a secured loan you will always be putting your asset (usually your home) at risk. Whilst it allows you to borrow a lot more money, you need to be comfortable with the level of risk before hitting ‘apply’.
If you find putting up your home as collateral makes you too uncomfortable, you will have to go for an unsecured loan instead. Whilst all borrowing has a level of risk, with an unsecured loan you usually won’t be putting a high-value asset at risk, and will instead receive extra charges or a CCJ if you fail to make repayments.
Secured loan checklist
Searching for a secured loan can be tricky if you have never applied for a loan before, so we’ve put together a checklist to give you a helping hand on what to look for. Once you’ve ticked off each of the following points, you should be much closer to picking the right loan for you:
- Loan amount – when searching for a loan you need to be clear on exactly how much you need to borrow. Never borrow more than you need as this can make it more difficult to pay back
- Loan term – how long are you comfortable borrowing for? The answer to this will invariably be the loan amount (plus interest) divided by how much you can comfortably afford to repay each month. This should roughly give you how many months it will take for you to repay the entire amount
- Interest rate – in the case of secured loans you should be able to see the interest represented as APRC (Annual Percentage Rate of Charge), which will indicate how much you’re likely to pay across your entire loan term
- Lender – if you have two very similar loan offers, your choice of lender might be a good way to decide between them. Have a look at the website and browse reviews to see if other customers have had a good experience or not
Considering the important elements above will allow you to find the right loan for you, avoiding any loans that you would struggle to repay due to an amount that is too high or a term that is too short. Find out more about secured loans here or the difference between secured and unsecured loans here.
When you apply
Once you are sure about your finances, the potential risk involved and exactly which loan you want to apply for, you should be able to go ahead and apply. We have some additional things to consider when you’re making your application:
- Calculate your LTV ratio – your Loan-to-Value ratio is the loan amount compared to the value of your home. For example, if you had a home worth £150,000 and you borrowed £30,000 against it, you would have an LTV of 20%. Whilst that is a low LTV, a mortgage would be a high LTV as you would be borrowing up to 90-95% of the value of the house
- Make yourself aware of any overpayment or early repayment terms – if you know that you can comfortably afford to repay the loan, you might even be able to overpay. Some loans will have a limit on how much you can overpay, or a charge for repaying your loan earlier than planned, so make yourself aware of these terms before you start the repayments
- Applying will perform a hard search on your credit file – you should already be aware that when you make an application there will be a hard search on your credit file. Depending on the outcome of the search, this can potentially alter your credit score. Make sure you always check your credit report and your eligibility before applying
- Rejection may lower your credit score – as you can imagine, a rejection may damage your credit score, especially if you have been rejected multiple times. Instead of applying again, find out what to do if you have been refused credit instead
Compare secured loans
Hopefully the information listed above will allow you to find the right secured loan for you, whilst ensuring you reduce the likelihood of any issues with repayments once you are accepted.
Make sure you always check your eligibility using moneymatcher before you apply, and if you have already complete the steps listed, use the link below to start browsing for secured loans.