If you have an asset, such as a house or a car, you may be able to borrow money using a secured loan. Secured loans can be useful for you if you need a larger loan over a longer term or you’re finding it difficult to get a personal loan.

It’s important to understand how secured loans work and their benefits and drawbacks before you go ahead and take one out. Read on to find out everything you need to know about secured loans.

What is a secured loan?

A secured loan, also known as a homeowner loan or second charge mortgage, is a loan that allows you to borrow money using your home as security in case you can’t repay it. You can often also use other assets such as your car or jewellery as security.

You’ll often be able to borrow more and over a longer repayment term than unsecured loans, and possibly at a lower interest rate, because secured loans are less risky for the lender. This is because they can take your asset if you stop making repayments.

How does a secured loan work?

A secured loan works in a similar way to other types of loan, such as mortgages or personal loans. You will apply to borrow a set amount of money to repay over a period of time, and if the lender agrees they will tell you how much your monthly repayments will be and what interest rate they will charge. This interest rate may be fixed or variable, depending on the type of secured loan you applied for.

As long as you make your monthly repayments on time, you won’t lose your home or other asset secured against the loan.

Secured loan rates

Secured loan rates vary depending on a range of factors, including:

• How much you want to borrow

• How long you want to take to repay the loan

• The value of the asset

• Your income and expenditure

Usually, the more you want to borrow and the longer the term, the lower the interest rate will be. You may see cheap secured loans at 4% interest, but rates usually vary between 6%-13%.

Advantages and disadvantages of secured loans

Advantages

• Borrow larger amounts: Usually you can borrow more with a secured loan than an unsecured loan. If you want to borrow more than £25,000, for example for a big home improvement such as an extension, secured loans can be useful as you can often borrow up to £100,000 or more.

• Easier to be approved: As your home or asset is used as collateral, it’s usually easier to be approved for a secured loan than a personal loan. So even if you have poor or little credit history, you still may be able to borrow.

• Borrow over a longer period: You can usually make repayments for your loan over a longer period, which can make larger loan repayments more manageable. While personal loans usually last a maximum of 7 years, secured loans can have terms of up to 25 years, making your repayments smaller.

Disadvantages

• Your asset is at risk: If you can’t keep up with your repayments, the lender can repossess your home or other asset to recover the debt. It’s important to remember that it’s called a secured loan because the lender gets security, not you.

• You’ll pay more interest: If you take out a secured loan to give yourself longer to pay back the debt, you’ll pay more interest. The interest is charged monthly, so the longer you have the loan for, the more interest you’re charged.

• Early repayment charges: Just like fixed rate mortgages that also have a fixed term, if you want to clear your loan before your term is over, you’ll likely have to pay early repayment fees. If you come into some money and want to pay your loan off early, it might be worth speaking to a financial advisor before you go ahead and make a payment in full.

Secured loans vs unsecured loans

If you’re unsure whether a secured loan or an unsecured loan is right for you, take a look at this table that compares the two:

Secured loans	Unsecured loans
Use an asset as collateral	No collateral required
Borrow up to £100,000 or more	Borrow smaller amounts
Pay back over terms of up to 25 years	Pay back over terms of up to 7 years
Interest rates from 4%	Interest rates from 6%
Early repayment fees often charged	Flexible repayment terms
Available to those with little or poor credit history	People with better credit ratings can usually borrow more with lower interest rates

How do I qualify for a secured loan?

All lenders will have their own eligibility criteria for a secured loan, but there is one thing that all lenders will require: an asset to secure the loan against. This means that if you can’t keep up with the repayments, the lender can take your asset to recover their losses.

What documents do I need for a secured loan?

To get a secured loan, you’ll need to provide the following documents and information:

• Identification (such as driving licence, passport, birth certificate)

• Proof of address (such as a bank statement, council tax bill or energy bill)

• Payslips, or SA302s if you’re self employed

• Bank statements (if the lender wants to check your expenditure)

As well as providing these documents, the lender will perform a credit check to see your financial history and ascertain whether you’re a good risk and likely to repay the loan.

What happens if I don’t pay back a secured loan?

If you don’t pay back a secured loan, you could lose your asset. There are a number of steps the lender needs to take before they can repossess your property; they could pass your debt onto a debt collection agency, then take further legal action if you still don’t pay. You could end up with a County Court Judgment where you’re forced to sell your asset to pay the lender back.

It’s always best to speak to your lender as soon as you run into problems with repaying your secured loan. The longer you leave it, the more difficult it will be to manage the problem cheaply.

Is a secured loan cheaper than a personal loan?

Yes, a secured loan is typically cheaper than a personal loan. As your asset is used as security for the loan, lenders will usually offer lower interest rates, meaning it’s cheaper to take out a secured loan than a personal loan over the same amount of time.

Do you need a credit check for a secured loan?

Yes, you do need a credit check for a secured loan. However, if you have poor or little credit history, you may still be able to get a secured loan as you are deemed less of a risk if you use an asset as collateral against the loan.

Every lender has different eligibility criteria, so while one lender may reject you based on your credit history, another may approve your application.

Compare secured loans

We’ve partnered with loan.co.uk to help you compare secured loans and find the best one for you. You could save up to 50% in costs – click ‘Get quotes’ now to see the latest secured loan rates.

Estimated monthly mortgage costs

Rates for other trades