Secured Loans
There are several types of secured lending in the UK today.
Before you consider taking out any type secured loan, you should make sure you are aware of any risks that might be involved.
In this article we explore the various options and the key things you should be aware of.
Table Of Contents
What is a secured loan?
A secured loan is a type of personal loan where you borrow money against the value of an asset that you own.
A borrower offering something as security gives extra security to the lender. This means that it may be more likely that you will be approved for a secured loan than an unsecured loan. It may also give you access to lending even if you have a poor credit score.
With a secured personal loan, you make set monthly repayments, made up of both capital – the original amount borrowed – and interest, over a pre-agreed term until the debt is repaid. But there is a risk of losing the asset if you don’t repay the loan.
Examples of secured loans include mortgages, homeowner loans, logbook loans and pawnbroker loans.
Types of secured loan collateral
The type of secured loan available to you will depend on the asset you have used as security.
Mortgages
A mortgage is a type of secured loan typically used to buy a property. The mortgage loan is secured on the property so if you don’t repay it as agreed, the lender has the right to repossess your home.
If you already own a property either outright or with sufficient equity, you can use a mortgage to borrow against your home and use the money for other purposes.
In the UK, mortgages are regulated by the Financial Conduct Authority (FCA).
Home equity loans
Home equity loans allow you to borrow against a proportion of the equity in your property, with the equity as security for the loan.
Equity is the difference between how much the property is worth and your (mortgage) debt outstanding on it.
Annual percentage rates (APRs) on home equity loans are usually higher than on standard mortgages.
This is because the lender will be second in line to get their money back if the property is repossessed to pay the debt (the original mortgage company is first).
Equity release loans
Equity release is a type of loan aimed at borrowers aged over 55 who either own their home outright or have a large amount of equity. You pay no monthly instalments, but the interest is added into the total borrowed. This means the total you owe grows over time.
An equity release loan is usually only repaid when the homeowner dies or goes into long-term care and their property is sold.
Second charge mortgages
A second charge mortgage is a type of home equity loan normally with a different lender to your main mortgage. It is sometimes called a ‘homeowner loan’ and works in a similar way to a home equity loan.
A homeowner loan from the same lender with which you have your mortgage is called a ‘further advance’. It will have a different (usually higher) interest rate than your main mortgage.
Logbook loans
A logbook loan is a loan against a vehicle you own. You can continue to use your vehicle during the duration of the loan but if you don’t repay the loan as agreed, the lender can repossess your vehicle.
You can normally borrow up to 70% of your car’s value as a logbook loan although some lenders might offer more.
Pawnbroking
Pawnbroking lets you borrow money in exchange for a valuable item (the ‘pawn’) that you own, such as a piece of jewellery, a musical instrument or a power tool.
The pawnbroker will keep the item until you repay the loan plus agreed interest. If you don’t repay it, the pawnbroker may sell the item to cover the amount borrowed plus the interest.
You might be able to borrow up to 80% of the value of your item pawned.
Secured loans vs. unsecured loans
With an unsecured loan, you do not have to put up anything as security for the money. This makes the loan agreement riskier for lenders so they will be more careful about who they lend to – you’ll need to pass a credit check, for example.
If you have a poor credit score, you might find you can only get a secured loan, not an unsecured loan.
If you can get unsecured borrowing, you might not be able to borrow as much as you would like. Interest rates are likely to be higher than for those with a good credit score.
The interest rates for secured loans can be lower than unsecured loans because the collateral reduces the lender's risk. But make sure you shop around for a loan – sometimes the interest rates can be quite similar for secured loans and unsecured loans.
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How do secured personal loans work?
The lender will value the asset you are offering as security for your secured personal loan and decide how much of that they will lend you.
Where to find secured loans
You can find a secured loan in many places including:
- Direct lenders (including online)
- Loan brokers
- Loan comparison websites
- Financial advisers
- Banks
- Building societies
- Pawnbrokers
Qualification criteria
The qualification criteria will depend on the type of secured loan but you will need to put something up as security. It will need to be worth more than you want to borrow as you might only be able to borrow 50% to 90% of its value.
If you use your home as security, the lender will look at how much equity you have rather than the overall value. Equity is the difference between your property’s value and how much you owe on your mortgage and any other loans secured on the property.
The lender may also need to see that you can afford the repayments or may only offer to lend you a multiple of your salary.
How much can you borrow?
Secured loans are normally for amounts from about £50 (if you pawn an item) up to £100,000 or even more (secured on a property).
Repayment terms range from a few months (pawnbrokers) up to 35 years (homeowner loans).
The highest loan amounts (£100,000 plus) and longest repayment terms will be if you use your home as security.
Secured loan products will have a maximum total loan-to-value (LTV) percentage that takes into account debt already secured on the asset.
For example, if your home is worth £200,000 and you have a £50,000 mortgage, your LTV will be 25%. If you take out a secured loan for £100,000, your total LTV will be 75%.
Application process
The application process for a secured loan could take several weeks. The borrower may need to provide information such as:
- Proof of identity (such as a passport or driver’s licence)
- Proof of address (such as a utility bill)
- Evidence of income (such as payslips)
- Information about other debts/financial obligations
If you are putting up your home as security, you may have to provide:
- Property deeds
- Land Registry information
- Mortgage statements
- Property insurance documents
If you are using another asset as security, you might need to show:
- Proof of ownership
- Valuation
- Appraisals/evidence of the asset’s condition
Once you make your application, the lender will run checks to ensure your collateral is suitable for the loan. It might also carry out an affordability assessment and credit check.
If your application is approved, the lender will make a formal offer including the loan terms, interest rate, loan amount, repayment schedule, and any fees.
Loan terms
The loan term is the agreed repayment period for the loan. For homeowner loans, this might be up to 35 years. For pawnbroker loans, the maximum is likely to be six months.
Is a secured loan right for me?
A secured loan could be right for you if you are confident you can afford to repay the money as agreed.
If you miss payments, the asset you used as collateral could be at risk of repossession.
If you can find an unsecured loan at a comparable interest rate to a secured loan, this might be a better option as your home or other asset will not be at risk.
Determining financial needs
Large secured loans are usually taken out for big purchases such as home improvements, buying a car or debt consolidation.
Think carefully before taking out a secured loan: is the reason you are borrowing worth the risk of losing your home or another item of value?
Evaluating your assets
You will need to find out the value of your asset. If you are using your home as security get an estate agent to do a valuation and look at your mortgage statements to find out how much you owe. This will help you calculate how much equity you have in your property.
If you are using another item as security, find out how much it is worth. However, the lender will carry out its own valuation and will only lend a proportion.
Understanding risk
The big risk of secured loans is that you might lose the asset you put up as security if you can’t repay the loan.
If you are repaying the loan over a long term – say, 20 or 30 years, are you confident you can continue to make the repayments for all that time? If you are borrowing for a few months, are you sure you will have the cash to make all the repayments.
What are the benefits of secured loans?
The key benefits of a secured loan are:
- You can often borrow more than if you took out an unsecured loan
- You don’t always need a perfect credit score to get a secured loan
- You can choose a repayment term to suit you, potentially up to 35 years
- Paying the loan back on time can boost your credit score
What are the risks?
The main risks of a secured loan are:
- You borrow more than you can afford to repay
- You will lose the asset you put up as security
- Non-payment of the loan could make your financial situation worse
What are the alternatives to secured loans?
Alternatives to secured loans include:
- Unsecured loans
- Short-term loans
- Credit cards
- Overdrafts
- Guarantor loans
Unsecured loans
Unsecured loans are loans that don’t require you to put forward an asset as security.
This means your home, or anything else you own, will not be at risk in the event you don’t pay back the loan as agreed.
Short-term loans/
A short-term loan can be used to borrow a small amount of money and repay it over a relatively short period of time.
Short-term loans, sometimes called high-cost, short-term credit, can be useful for emergencies, such as needing a new washing machine, car repairs, or making ends meet if you’re struggling for money.
You will usually need to repay a short-term loan within a few months to a year.
Secured loans: FAQs
What happens if I default on a secured loan?
If you fail to repay a secured loan for several months you will be in default.
This means that the lender can ultimately repossess the asset you used as security.
If you have a homeowner loan or second charge mortgage, the asset will be your home (or other property you own).
If you borrow from a pawnbroker and don't repay the loan as agreed, the pawnbroker can sell your item and use the money to pay off your debt.
Although repossession is a last resort, the prospect of losing the asset used as security means secured loans are high risk for borrowers.
Does a secured loan hurt your credit rating?
Repaying a secured loan on time can improve your credit rating. An improved credit score will make it easier to borrow money in the future, and cheaper too.
But failing to pay a secured loan on time can have a negative effect on your credit score.
Summary: Secured loans
Secured loans can be a good borrowing option if you need to borrow a significant amount of money and have an asset suitable to use as security. You also need to be confident you can afford the repayments for the duration of the term.
But bear in mind that failing to repay a secured loan can ultimately result in losing possession of the asset offered as security. In the case of homeowner loans this will be your home. When considering secured versus unsecured loans, weigh up all the different factors.