By Matt Fernell, Editor-in-Chief at Finance.co.uk. Published 15th November 2023.
Secured loans, also known as second-charge mortgages, homeowner loans, or collateral loans, are borrowing that uses an asset as security. In most cases, this is your home or a property that you have a stake in.
The value of your property is used as collateral, so the equity in your home will be used to repay the debt if you default on your loan. This means your home could be at risk if you’re unable to keep up with repayments.
A secured loan works a lot like a personal loan. You apply to the loan provider, and if successful, they will lend you the money you’ve asked for.
You then need to repay the loan over an agreed number of years, making monthly repayments. Your repayments will include the interest charged and part of the loan balance.
However, with a secured loan, you use your property as security for the loan. This means that if you cannot repay what you borrowed, the lender can repossess your home to cover the debt.
The application process is also different from a personal loan because you will need to provide proof of your home ownership and the property’s value.
The main difference is that a secured loan uses an asset, usually your home, as collateral for the loan. With an unsecured loan, you don’t need to provide security, and repayment terms are more flexible.
You can use a personal loan for any purpose, such as buying a car or going on holiday; however, if your credit score is poor, your loan application could be rejected.
Loans secured by property are typically for more significant amounts and are borrowed over a longer period. A homeowner loan is less dependent on your credit history but could be riskier.
Here are the main differences to help you work out what’s best for you.
Minimum loan amount of £5,000
Maximum loan amount of £500,000
Typical loan term of up to 35 years
Collateral is needed
Mortgage is required
Interest rate is often variable
Can get them with a bad credit score
Minimum loan amount of £1,000
Maximum loan amount of £50,000
Typical loan term of 7 years
Collateral is not needed
A mortgage is not required
Interest rate is usually fixed
Unlikely to get one with a bad credit score
The most important thing you need to get a secured loan is an asset to use as loan collateral. In most cases, this needs to be your home.
When you make your application, you’ll need to provide the following information:
Proof of identity, i.e. passport or driving licence
Evidence of income and expenditure
Details of any outstanding debts
The loan provider will also carry out a credit check on your record to understand how you have previously managed credit.
It’s a good idea to ensure your credit report is in good shape before applying. Be aware that it can harm your credit score if you apply for several loans in a short space of time.
Most secured loans use your home as security against the loan; however, there are a few different types that work slightly differently:
Homeowner loan - your home is used as collateral if you fall behind on your payments
Logbook loan - your car or vehicle is used as the security for the loan
Mortgage - this loan is used to purchase a property or land, which can then be repossessed if you miss your payments
Second-charge mortgage - this is a second mortgage on your property, using the equity as security
Bridging loan - this is used when you want to buy a new property before you have sold your current one
When you apply for a secured loan, you can choose between three interest rate options:
Fixed-rate: the interest rate and monthly repayment amount are fixed for an agreed term. This means your payments will remain the same throughout the borrowing period.
Variable rate: the interest rate may fluctuate depending on market conditions; therefore, your monthly repayment will vary.
Short-term fixed rate: this is a combination of the two where you may be on a fixed rate for the first few years and move on to a variable rate for the remaining term.
Which option is best for you will depend on your circumstances and attitude to risk. A fixed rate can mean your repayment amount will remain the same for the lifetime of the loan, but you could miss out on a cheaper deal if interest rates go down.
A variable rate can often offer the cheapest initial deal but can change anytime. This makes it hard to budget, and your payments could go up if interest rates increase.
If you are accepted for a secured loan, you can use the money in any way you like. Secured loans are usually for large sums of £10,000 or more, so typical uses include:
Making home improvements
Consolidating your debts to make them cheaper
Big one-off purchases like a new car or holiday
Funding a new business or venture
Getting a secured loan is a long-term commitment, and your home will be at risk if you don’t keep up repayments. Therefore, make sure you need the money and that a secured loan is the right option before starting an application.
The maximum amount you can borrow will depend on the value of your property. The more home equity you have, the greater the amount you could potentially borrow.
You can typically borrow anything between £10,000 and £500,000 if you have the equity in your home to cover the cost.
If you want to borrow less than £10,000, a personal loan could be a better option for you.
Yes, you can get secured financing even if you have bad credit. As long as you have a mortgage and equity in your home, you can borrow against your house and get a secured loan.
In many cases, it could be easier than getting a personal or unsecured loan, but that will depend on the amount of risk the lender is prepared to take.
Sometimes, secured homeowner loans with bad credit can be used to consolidate debt to help you manage your repayments better. If you make regular payments on time and in full, a secured loan may help you repair your credit score.
How much you pay for a homeowner loan will depend on several factors. The eventual cost will depend on:
the amount of money you borrow
the length of time you need to repay the debt
the rate of interest
any loan fees charged
There may be additional fees when you apply for a secured loan, for example, you might need to cover the cost of a valuation on your property. Some lenders also charge arrangement fees.
Speak to a secured loans broker to determine how much you could borrow and how much it will cost.
There are several different ways you can borrow money other than using a secured loan. However, if you want to borrow a large amount of money, for example, £50,000 or more, a secured loan may be your best option.
If you’re looking to borrow a smaller amount, then you should consider some of the other options, including:
The information provided does not constitute financial advice, it’s always important to do your own research to ensure a financial product is right for your circumstances. If you’re unsure you should contact an independent financial advisor.