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Secured loans explained

A secured loan, also known as a homeowner loan or second charge mortgage, provides a way to borrow large sums of money most often using the equity of your home as collateral against your repayments. There are, however, other types of secured loans that allow you to use your car (logbook loans) or another valuable asset as collateral.

Technically, a mortgage also counts as a type of secured loan, since you’re risking repossession of your house to get the funds to buy it in the first place. That’s why secured loans are also sometimes referred to as second mortgages or second charge mortgages, with the initial mortgage that allows you to buy your house referred to as the first charge mortgage.

Homeowner loans are a type of secured loans where the asset used as security is a residential property. 

Bridging loans are a type of short term secured loan. These can be secured against a property you already own or have a mortgage on or against a property you wish to buy. Find out more about how bridging loans work.

Compared to unsecured loans, secured lenders can be more lenient when it comes to evaluating the credit history of applicants. This is because they have the additional security of a property or other asset to repay the debt if you default.

You can check your credit score or compare secured loans for bad credit.

A secured loan is usually used to fund purchases or debt consolidation for sums over £25,000. A secured loan can be used for debt consolidation, to pay back credit cards, other loans and debts and to reduce the monthly cost of the loan. They can also be used for major home improvements or extensions, for example converting an attic, extending a kitchen, buying new windows or doors or adding a conservatory.

Unlike secured loans, unsecured loans do not require you to put up collateral. However, it’s worth remembering that if you get into enough debt, you may still end up having to sell your house in order to repay your lenders, even with an unsecured loan.

Aside from this, the main differences are:

• Secured loans can allow you to borrow a much larger amount than unsecured loans. There is some overlap at the lower end of the scale, however, which means that for a smaller loan you will have to weigh up the benefits and liabilities of each type very carefully.
• You will generally be able to get lower interest rates on secured loans, as lenders will feel more secure lending at lower rates, given that they would be able to take payment from the asset if you are unable to pay them back yourself.

Of course, as always, the rates that you are able to get will depend on your credit rating, as well as how savvy you are about finding the best deal out there for your requirements.

Note that a period of unequal competition in the different loan markets can mean that the best interest rates will not be found in the secured loans market, but rather the unsecured loans market, which is why you should always compare loans for yourself.

Even if you’ve compared the best secured loans and found the lowest rate possible, you may still be hesitant considering that if you fail to keep up with repayments your home may be repossessed. Secured loans certainly require careful consideration, but if you’ve got a large expense coming up and you know you’ll be able to make the repayments every month, they could be the right choice. Likewise, if you’ve already got some debt or a bad credit rating and you need funds to get back on your feet, you are more likely to qualify for a secured loan than an unsecured one.

Possibly more challenging than deciding whether or not to take out a loan is finding the best secured loan for your needs. Bear in mind that this is not necessarily the loan with the lowest interest rate, as that might not have the right terms or could charge higher fees. Always compare the fees, conditions and the interest rate before deciding.

Other things to consider are:

• Is it a variable or fixed rate loan? Remember that variable rate loans may charge lower interest, but could change their rate at any time.
• How long will you have to pay the loan off? The shorter the term, the higher your monthly repayments are likely to be, but also the sooner you will be able to repay the loan. If you’re not confident you’ll be able to repay it in the minimum term offered by the loan provider, a longer term with lower monthly repayments might be a safer bet.
• How will your credit score impact the rate you are offered? Sure, you can get a secured loan with poor credit, but that doesn’t mean you’ll get the advertised rate, which the lender only has to offer to the majority of applications, not all.

The criteria, much like the loan amount, can often come down to personal preference and circumstances. What is not up for debate is how much you have to offer.   Above you will see the max LTV mentioned, this refers to the loan-to-value (LTV) of your current mortgage combined with the value of the second charge mortgage on offer. Generally speaking, the lower your LTV – and therefore the greater amount of equity you have – the better a loan you can get. Just like with regular first charge mortgages, a low LTV marks you as being less risky to the secured loan provider, as you’re essentially borrowing a lower percentage of your home’s value.

If you are a homeowner with debt or a large purchase to consider, one of these loans could be for you. Note that while it is possible to take out a secured loan on a property you are renting out, it is not possible to apply for a secured loan if you are not the sole owner of the property you would like to use as security.

There are of course some more eligibility criteria, which will differ between providers; you will most likely have to have been a UK resident for some years, and have a stable address and income so the lender knows you’re a good bet. However, unlike with unsecured loans, a poor credit rating does not necessarily disqualify you from a homeowner loan.

Why secured loans are more amenable to those who don’t exactly have a perfect credit score goes back to the main difference between secured and unsecured loans. Because you put up an asset as collateral against the loan, it is easier for loan providers to take the (lesser) risk. Instead, you take on the majority of the risk, as you could lose your home if you are unable to repay the loan.

Someone with bad credit may not be able to get the best secured loan, or indeed the rate as it is advertised, but if your only option is to borrow money, then a secured loan could be a better option than an unsecured one. For one, loan brokers tend not to start with a credit check, which means you can inquire about secured loans without immediately risking your credit score being damaged further. And, as stated above, you should be able to get a lower interest rate on a secured homeowner loan.

A second charge mortgage is a type of secured loan where the borrower already has a mortgage against the property. The mortgage lender has the 'first charge' and the secured lender the 'second charge'. This means that should the borrower default and the property is repossessed and sold, the mortgage lender will be able to recoup their debt first, then any proceeds left will be available to the secured lender. 

If you use such a loan responsibly, and don’t miss any repayments or indeed overpay, you could improve your credit rating. There may however be other ways to improve your credit that are more suitable.

Related to building equity, you could consolidate all your debt into one single secured loan to make repayments easier and maybe even improve your credit score as you climb out of the red. However, consolidating a secured loan into another secured loan could be both tricky and risky; not only could it be harder to find a lender who will take you on, you could end up paying more in interest, incur early repayment fees and take longer to pay off the debt, which is why it would be a good idea to seek independent advice before considering this.

Rather than consolidating your loans, it might be a better option to keep your secured loans separate. There will certainly be a limit to the number of such loans you can have, though, especially if you don’t treat them responsibly. Again, don’t hesitate to seek advice if you’re not sure what to do, or you’re feeling overwhelmed by debt, from a debt charity for instance.

There are both fixed and variable rate loans available, so you should consider if you’d prefer repayment security or you’d rather take your chances on a lower rate that might go up in the future. It is easy to see in the chart above which loans are variable and which offer fixed rates.

If you don’t have any equity that a lender can use as a security against your loan, you are very unlikely to be able to get a homeowner loan. Contact an independent adviser to find out what your options are.

If you miss too many repayments, your lender could take you to court and you could lose your house. To avoid this, and if you really can’t afford to make a repayment anymore, ask your lender if they allow payment breaks or deferment for a little while. In fact, this would be a good question to ask before you take out a loan. If you’re stuck, consider seeking professional advice from a debt charity.

Yes, early repayment can be an option, but the lender may choose to charge you an ‘early settlement fee’. This is to offset the loss of the interest on the loan that you would have paid if you would have continued repayments to the end of the term.

Secured loans are regulated by the Financial Conduct Authority, the UK’s financial regulator, so lenders will require you to show that you will be able to repay the money before they will lend to you. They are subject to the same regulations as regular mortgages.

Secured loans can be a good idea, but you will have to weigh the benefits against the risks and make that decision for yourself. The benefits are obvious – a large lump sum with a reasonable repayment term and relatively low interest rate.

The main risk that comes with a secured homeowner loan is similar to the risk that comes with taking out a mortgage; if you fail to keep up with repayments, you risk the asset that you’ve used to secure the loan being repossessed, which means in an extreme case you could end up losing your home, even if you are keeping up with your regular mortgage payments.

To minimise this risk, you should never take on such a loan if you are not sure you will be able to keep up with the monthly repayments. Make a budget, calculate your monthly expenses, and give yourself a decent margin in case of unforeseen circumstances. Especially if you’re taking out the loan to complete home improvements, you should do a thorough risk assessment, as renovation projects can often get delayed or otherwise end up more costly than anticipated.

Debt consolidation is where you take all or some of your existing debts and pay these off under a single credit agreement, such as a loan, secured loan or a balance transfer credit card. The aim of debt consolidation is to reduce the amount you are paying in interest for these debts each month.

You can consolidate your debts to reduce your monthly repayment in a number of ways:

• Moving to a loan that has a lower rate of interest than your current debts.
• Moving to a loan that allows you to reduce the monthly repayment by paying back the debt over a longer period of time.
• Moving to a 0% balance transfer card.

You need to be aware that 0% balance transfer cards may incur a ‘balance transfer fee’ – usually a percentage of the total you would like to borrow. In some cases, you may also find the interest rate you are offered on a loan is higher than the advertised rate, as providers are only obliged to offer the advertised rate to 51% of customers.

The most important thing to do when consolidating debts, such as credit or store cards, is that you don’t start using them again to rack up even more debt once you have paid them off. Instead, remove the temptation and cancel them straight away before you can slip back into old habits.

If you are struggling with debt, you could take a look at our guide on 12 steps to get debt free. In addition to this, you’ll find that both the Citizen’s Advice Bureau and Money Advice Service can offer impartial advice, support and helpful guidance.

A second mortgage and a secured loan are essentially the same thing, both require you to use your home or property as collateral against the loan. If you already have a mortgage on your property and are looking for a secured loan, then it is in fact a second mortgage on your home. Secured loans have a similar application process to traditional mortgages, with the need for the lender to prove the loan is affordable.

If you cannot meet your secured loan payments your property could be repossessed and sold. If you have a traditional mortgage and a secured loan, then your mortgage lender would be able to cover their outstanding debt first and anything remaining would go to the second mortgage lender. The ultimate risk of not paying your secured loan is that your property is repossessed by the lender and your credit history is adversely impacted. The first and most important thing to do is to contact your lender and discuss why you have not been able to make a payment. They may be able to agree an interim arrangement if your failure to pay is only temporary. If you are encountering financial difficulties, then you can contact your local Citizens Advice Bureau for debt advice.

It may be a good idea to consolidate your debts if:

• You have accumulated a number of debts over time and these are becoming cumbersome to manage.
• If the rates of interest on your debts cost more than a consolidation loan rate.
• If by consolidating your debts over a longer period of time results in a more affordable monthly payment, therefore potentially preventing further debt. However, it should be noted that taking out a loan over a longer period may result in more interest being paid.
  If you are struggling to manage your day-to-day finances or are already missing credit payments, then you should seek help to establish if a consolidation loan or another arrangement would be best for you. Organisations such as the Citizens Advice Bureau or the Money Advice Service could help.

Applying for a secured loan is a similar process to getting a mortgage that includes checking you can afford the monthly payments and reviewing your credit history. To apply for a secured loan, you’ll be expected to provide your usual personal details and employment details, including your salary and how long you have worked there. You will also be asked what you plan to spend the loan on, as well as your monthly outgoings and details of any outstanding debts such as credit cards, mortgages, other loans or HPI payments.

It’s important to be honest and open – especially about any existing debts you have. Lenders ask for these details to ensure that you will be able to afford the loan repayments and to prevent you from increasing your debt level beyond your ability to repay what you owe.

Loan applications can be made in writing (using an application form from the lender) or online – with regards to electronic applications some lenders can give you an instant decision on whether your loan has been accepted or needs to be looked at further.

For secured loans, you might find that the lender requests proof that you are the owner of the assets that you are securing against the loan. The process for obtaining a secured loan is similar to getting a mortgage, requiring in-depth checks and documentary evidence to support your application. In fact, they are a form of regulated mortgage arrangement. You will have two mortgages secured against the property rather than the property secured against two mortgages.