Secured loans refer to borrowing money which is secured against valuable collateral such as your home, car, van or office building. In most cases, this is a loan secured against your home and based on its value, you are able to borrow sums ranging from a few thousand to even millions of pounds.
With over 2,000 secured loans (external link) funded on average each month in the UK and worth in the region of £100 million, the secured loans market is buoyant. Secured loans are a popular source of finance for households looking to consolidate debts, make home improvements or free up some of their finances.
To be eligible, you must be a homeowner and own your property either in part or outright. By using your property as collateral, you can access large amounts and pay low rates. However, it is important to note that your property could be at risk of repossession if you are unable to keep up with repayments.
What are the types of secured loans?
The most common type of secured loan is a second charge loan or second charge mortgage. This essentially becomes the second priority in payment after your first mortgage has been paid each month. It is typically a loan secured against your home and the amount you can borrow is high, but just less than your main mortgage. In terms of repayment, you will have the option to repay over 1 to 30 years.
To remortgage means to get a new mortgage deal under potentially more favourable terms. With some mortgages lasting 5, 10 or 20 years, you may find that you now have a higher income, better credit rating and more equity in your property, so can apply for better terms and lower rates. With a remortgage, you can also release a sum of cash (£50,000 for example) and use this for everyday purposes. You can also include repayments into your monthly mortgage, so it is a seamless transition.
For homeowners over 55, you can release money that is tied up in your home. If you have been paying your mortgage for several years or have purchased the property outright, you can release 20% to 60% of the property’s value and receive this in one large sum that is also tax-free.
You can continue to live in your home throughout and also benefit if it increases in price. You can avoid paying any interest during your lifetime and the loan can be rolled up into your estate and paid back to the lender when you die or go into long-term care.
What are secured loans used for?
Data shows that around 50% of borrowers use secured loans to consolidate their debts. For any student loans, mortgages or personal loans, these can be paid off in one go and you can then simply pay into one pot.
22% of borrowers use secured loans for a combination of debt consolidation and home improvements, with 19% focusing on just home improvements.
When using a secured loan for home improvements, such as a loft conversion, kitchen extension or home renovation, this can be a smart way to add value to your property. Check which home improvements can add the most value to your home (external link).
Other reasons for using secured loans include paying for weddings, starting businesses, paying for funerals, car purchases, holidays, school fees and more.
What are the terms?
The terms can vary for each loan, but typically:
- rates can be from 3.34% annual percentage rate of charge (APRC)
- loan terms can be from 1 to 30 years
- you must be a homeowner
- your security is at risk
- all credit histories are considered
- you might get the option to repay early, but you may have to pay a charge for this
What to consider before applying
Choosing your loan terms
Whilst applying to borrow the highest amount and for the longest period might seem sensible, this may be more money and for longer than you require.
The longer the loan is open, the more interest that it will accrue. Similarly, if you are borrowing large sums, this will also incur more interest. Therefore, working through a budget beforehand and deciding the exact amount that you need and how long for can be a very cost-effective exercise.
Risk of repossession
If you do not keep up with your repayments, the lender may repossess your property to recover the loan amount.
This may be part of the property or the entire thing, depending on the amount that you have borrowed. Some lenders or banks can claim their stake in your property in the event that it is sold in the future.
Lenders will only issue repossession as a last resort and they will always take other precautionary measures to help you repay your loan on time. This includes offering arrangements to pay, loan extensions and guidance to avoid repossession.
When using a secured loan, you want to avoid the repossession of your property at all costs, especially if it is the main residence for you and your family.
Certainly if you are using a secured loan for debt consolidation, by taking unsecured loans and converting them to a secured loan can be risky, so always be sure to have a repayment plan in mind.
Make sure that you have planned how you are going to repay your loan on time and can prevent your property being repossessed.