What is a Secured Loan and How Do They Work?

Secured loans offer a way of borrowing money if you have an asset that you can use as security or collateral for the loan. A secured loan is usually backed by a high-value asset, typically your home, which can help to improve your chances of getting accepted for a loan.

But while a secured loan generally lessens the risk to lenders of offering a loan, borrowers are taking on more risk. This is because you could lose your property to the lender if you fail to make repayments when you should.

Read on to find out more about how secured loans work, the different types of secured loan you can get, and when you might choose to take out a secured loan.

Secured loans explained

A secured loan is a type of borrowing that uses an asset as security for the loan. This is known as ‘collateral’ and can help to minimise the risk for the lender if you don’t manage to repay the loan. Because of this security, you might find you’re able to access larger loan amounts and lower rates of interest with a secured loan.

Secured loans will usually be secured against your home – this helps to explain why secured loans are also sometimes referred to as homeowner loans or second charge mortgages.

In this article we mainly talk about loans secured against property, but there are secured loans that might allow you to borrow against other assets, such as vehicles, jewellery and other high-value items.

Crucially, with any secured loan, if you don’t make your loan repayments, your lender could repossess the asset you put forward as security so it can recover the funds it is owed.

What is the difference between secured and unsecured loans?

The main difference is that secured loans require you to put forward an asset that you own as security against the loan whereas unsecured loans – also known as personal loans – don’t. .

Since the collateral that you must provide with a secured loan gives lenders extra reassurance by mitigating some of the risk of lending, you can typically borrow more and access lower interest rates with a secured loan than an unsecured loan. Secured loans also tend to offer longer repayment terms and might be easier to get if you have bad credit or are self-employed.

On the flipside, a secured loan comes with the direct risk of losing the asset you’ve used as security if you fail to keep up with your repayments. By comparison, missing payments on an unsecured loan might result in a penalty charge, but your personal assets would only potentially be at risk if the lender took you to court to recoup what you owe.

» MORE: How are secured and unsecured loans different?

How does a secured loan work?

In many ways, secured loans work like any other loans. When you apply for funding, lenders will perform a credit check and assess your overall financial situation to see if you would be able to repay it.

The value of your property and the amount of equity in your house you actually own will help to determine how much you can borrow with a secured loan, alongside the standard affordability tests.

Secured loans are often for larger sums of money and tend to be secured on property, so the application process may take longer than for an unsecured loan. Interest rates on secured loans can be either fixed, meaning the rate stays the same, or variable, where the rate might change.

Most secured loans are taken out via a broker, although it is possible to get secured loans directly from a lender.

If approved for the loan, you will then need to make the agreed monthly repayments. If you pay on time, this will feel like repaying any other type of loan. But if you miss repayments, your lender could take your asset and sell it to make sure they get back the money that they are owed.

How much can I borrow with a secured loan?

It’s usually possible to borrow more through a secured loan than you can through an unsecured loan because lenders know they have the security of being able to claim your asset if you don’t pay back what you owe. Our broker partner, Norton Finance, typically offers secured loans for anywhere between £3,000 and £500,000 if you’re borrowing against your home.

Exactly how much you can borrow will be determined by a combination of factors including:

• the value of the asset you’re using as security
• the equity you have in your property (if your home is the collateral)
• your regular income and expenditure
• any outstanding debt you might have
• your credit standing
• the reason you want the loan
• the lender’s own eligibility criteria

Lenders should always consider how much you’re likely to be able to afford to repay each month when deciding on the loan amount you’re offered.

How long can you have a secured loan for?

Secured loans are typically available with repayment periods of anywhere between one and 30 years through our partner, Norton Finance. There may also be some lenders that allow you to pay back a secured loan over as long as 40 years.

Secured loans tend to offer longer repayment terms than unsecured loans, where the maximum repayment period is often seven years.

What happens if you don’t repay a secured loan?

Missing repayments on a secured loan means you risk losing the asset you put forward as security. So if you used your home as collateral, and you continually miss repayments, the lender could take possession of your property in order to get back the money it is owed.

If you think there is a chance you’ll miss even one repayment, you should talk to your lender to discuss your options. You should receive a notice of arrears if you fail to pay two monthly or four weekly repayments. Should you miss between three and six monthly payments, you could receive a default notice, typically giving you two weeks to clear your arrears. If you don’t, a default could be registered on your credit report, potentially making it more difficult to get credit in the future. A registered default also triggers the requirement for you to immediately repay your entire outstanding loan amount.

If you fail to meet your repayment obligations after a default has been registered, your lender could then bring court action against you with the intention of forcing you to sell your property to cover what you owe.

» MORE: Seeking help from debt charities

Can you pay off a secured loan early?

It might be possible to pay off a secured loan early, potentially helping you save money in interest payments in the long term. However, you may have to pay early repayment charges for doing so.

These fees can vary between lenders, so always check the terms of your loan to see what these charges might be.

What are the different types of secured loan?

The main types of secured loans which are secured against property are:

• Mortgages: A mortgage is a loan that helps you to buy a property. The amount you borrow is secured against the property until you finish making repayments.
• Second charge mortgages: If you still have an existing mortgage, a second charge mortgage can be secured on the equity you have in your home. They are also often called homeowner loans.
• Bridging loans: These short-term loans are typically used to help bridge the gap between buying a new property and selling another. Businesses might also use a bridging loan for a cash injection or to fund expansion.

Loans secured against assets other than property

There are also other types of secured loan where the loan is secured against an asset other than your property. These include:

• Logbook loans: This is usually an expensive form of borrowing that allows you to access a loan secured against a vehicle you own. You can continue using the car but, until you repay the loan in full, ownership of the vehicle passes to the lender. This type of loan is not available in Scotland.
• Pawn shop loans: A pawnbroker, or pawn shop, offers loans based on the value of an item, such as jewellery, which the pawnbroker will keep until you repay the loan.

This article mainly focuses on loans secured against property. We have separate articles if you want to learn more about logbook loans and pawnbrokers, and how they differ from other secured loans.

What are the pros and cons of secured loans?

Secured loans are a big financial commitment, making it important that you consider their potential drawbacks alongside their benefits.

Advantages

• You can borrow larger amounts than with unsecured loans.
• They often come with the option of longer repayment terms.
• Interest rates tend to be lower than on unsecured loans.
• It might be easier to get a secured loan than other types of loan.

Disadvantages

• You risk losing your home, or the collateral used to secure the loan, if you don’t keep up with repayments.
• Paying a loan back over a longer term means you’ll probably pay more interest overall.
• The interest rates may be variable, so your monthly payments may change.
• Some secured loans have expensive set-up and arrangement fees.
• They are only available if you own sufficient equity in your home or have another asset to use as security.

Why might you choose a secured loan?

There are many reasons why you might take out a secured loan, including if:

You want to borrow a larger sum of money

You will typically be able to borrow more with a secured loan than an unsecured loan, so it is useful if you need a substantial amount of money – to pay for home improvements, for example.

You don’t have a good credit score

Secured loans may help those with a poorer or bad credit score to access finance with relatively lower interest rates. Secured lenders have the added security of your property, in case you can’t repay the loan, so their interest rates will often be lower than on an unsecured loan.

You want to consolidate your debts

If you have a number of existing debts you may want to think about consolidating them with a secured debt consolidation loan. While this can help to make your debts more manageable and can reduce your monthly repayments, you should always check to see how much you will be repaying in total. If you repay your debts over a longer period of time, you may end up paying more interest and paying more overall.

Furthermore, you should bear in mind that by consolidating unsecured debt with a secured loan, you will be putting your property at risk if you don’t manage to keep up with repayments.

» MORE: Secured vs unsecured debt consolidation loans

What do I need to consider before getting a secured loan?

A secured loan is a significant commitment, so you should only apply if you are confident that you will be able to repay it in full. Primarily you need to be comfortable with the risk that you could lose your property if you don’t keep up with your repayments.

If you can get an unsecured loan that meets your requirements, this type of loan won’t put your property directly at risk. You can check your eligibility for an unsecured loan without affecting your credit score.

To help you find the most suitable loan, you should work out how much you need to borrow and how long you want to repay it. You can then compare the total cost of borrowing by looking at a loan’s annual percentage rate (APR), which includes interest charges and any additional fees.

If you decide that a secured loan is right for you, always shop around and compare lenders to find the option that is best suited to you.

» COMPARE: Secured loans

Does having a secured loan affect remortgaging?

It is possible to remortgage if you’ve taken out a second loan against your property (so alongside your mortgage), but you might find there are fewer remortgage deals open to you.

This is because lenders will take the debt from your second loan into account when deciding whether you can afford to remortgage.

» MORE: How secured loans can affect remortgaging

How can I find a secured loan?

You may be able to get a secured loan by approaching a lender directly or you might want to use a broker.

The main benefit of using a broker, such as our partner Norton Finance, is that you can quickly find and compare secured loans that are suited to your circumstances. Some lenders of secured loans might only accept applications via a broker.

» COMPARE: Secured loans

Is it easy to get a secured loan?

Assuming you’re a homeowner, secured loans are generally considered easier to get than unsecured loans. This is because lenders are taking on less risk, and so could be more willing to lend, if a loan is backed up with an asset such as your property as security.

Knowing they have the collateral to fall back on if the loan isn’t repaid, secured loan providers may place less onus on other factors such as your credit score when deciding whether to offer you a loan.

Can I get a secured loan with bad credit?

Yes, it is possible to get a secured loan with bad credit. Indeed, if you have less-than-perfect credit which is making it difficult to get an unsecured loan, you could find it easier to get a secured loan.

That’s because lenders are likely to be more willing to offer you a loan if you can reduce the borrowing risk that they are taking on – and that’s what providing an asset as security does.

» COMPARE: Secured loans for bad credit

What documents do I need for a secured loan?

When applying for a secured loan, you may need to provide the lender with:

• proof of identity, such as your driving licence or passport
• proof of address, such as a utility bill
• proof of employment and income
• bank statements
• details of the asset being used as security, so perhaps a mortgage statement if using your home

The lender will also conduct a credit check to see how you have managed credit and repayments in the past.

» MORE: All about applying for loans

What are the alternatives to a secured loan?

Some of the alternatives you should think about before taking out a secured loan include:

• Unsecured loans: If you don’t need a larger loan and want to avoid putting your property at direct risk, an unsecured loan can be taken out without the need to put forward an asset as security.
• Guarantor loans: This form of unsecured loan is different because with a guarantor loan you’ll need a guarantor – typically a relative – who is willing to guarantee they’ll step in to make your repayments if you don’t.
• Remortgage: Rather than taking out a separate loan secured against your home, you could consider applying to borrow more on your existing mortgage or remortgage to release equity that you have in your property.

» COMPARE: Remortgage deals

WARNING: Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a loan or any other debt secured on it.

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