Secured loan, what is it?

Simply put, a secured loan is only available to property owners (with a mortgage), where the lender retains security against your house to get its money back if you can’t repay. The ‘secured’ bit means the lender gets ‘security’ not you, so if there are problems it can repossess your home but only as a last resort.

When we normally talk about personal loans from a bank or building society, these are unsecured, which means there’s no automatic link to your home (so non-homeowners can borrow this way too).

Why would anyone want a secured loan?

Easier to obtain

Unsecured loans are often cheaper for those with decent credit scores, but a secured loan allows homeowners to borrow larger amounts over long periods due to lenders being able to use security against your property.

Check credit reference files

Those rejected from unsecured lending without an obviously poor credit history should check their information held by the credit reference agencies Equifax, Experian and CallCredit isn’t erroneous.

Debt counselling

For those consistently struggling with debts and meeting repayments, free personal help is invaluable. Do it as quickly as possible, the longer you leave it the worse it gets. Avoid commercial debt management companies.

A number of completely free, charity-based or publicly-funded bodies offer a fantastic service: StepChange, National Debtline, Citizens Advice Bureau and the Community Legal Advice if you are considering taking out an IVA or any other formal debt resolution scheme.

Getting a secured loan cheaply and safely

How much to borrow?

Get a handle on your existing debts first; list them on a piece of paper. Once you know the secured loan rate, draw a line across the page where this fits in. The secured loan should only be considered to pay off the more expensive debts above the line.

Don’t feel all debts should be consolidated into one. This is a common secured loan sales pitch, yet in isolation it serves no real purpose. Remember, if you’re repaying a higher rate or for longer, your lender makes more cash, you don’t make savings.

You’re converting a fixed rate into variable rate debt.

While most un-secured loan interest is fixed for the life of the loan, secured loan rates are usually variable and can shift both with UK base rates and for the lenders’ own reasons – check the terms.

If you’re considering converting fixed rate debt such as a standard personal loan into variable rate debt, always ask “could I afford the repayments if rates increased?”. If not, don’t do it. Don’t throw certainty away. Some secured loans offer rate fixes, but usually only for a limited period; and do always check there are no penalties for paying off your existing debts early, something common with un-secured loans.

Finally, don’t borrow more than you need.

And most importantly if you think you won’t be able to make the repayments, don’t even start down this route, it isn’t worth it – see the free debt counsellors instead.

How long to borrow for?

Budget to work out the maximum realistic amount you can commit to repaying, use the Budget Planner to help. Don’t underestimate or it’ll take longer to repay, costing more interest; and don’t overestimate or you may overstretch yourself, risking your home. Careful planning is crucial.

How much does it cost?

What the rate depends on

The interest rate offered on a secured loan depends on the loan size, length, your ‘credit score’ and the ‘free equity’ in your home. Lenders assess these factors in different ways. One may be cheapest for good credit scorers with limited equity but uncompetitive for poor credit scorers with high equity.

Your credit score depends on a range of factors, mentioned in the Your Credit Rating article, but the most important are income and outstanding debts, arrears (being behind in repayments), defaults (failing to make repayments), County Court Judgements or CCJs (where repayment failures have been taken to court) or bankruptcy (a legal judgement relieving a person of all past debt commitments).

‘Free equity’ is the difference between a property’s value, and the amount owed on it. The bigger the difference, the better rate you’ll be offered. Recent house price rises mean more people have more ‘free equity’ in their homes.

Comparing the price

When organising a secured loan, all costs should be paid by the lender and included in the interest rate (APR), including the property valuation and legal fees.

Finding the best deal

Arrow Loans is a Direct Lender and can offer you the best rates for your situation. We offer very fast decision on all secure loan applications. Alternatively, ask your existing mortgage lender.

Repaying early?

This can make sense. A secured loan can be flexible and overpaying to clear the debt quicker is allowed by law. Examine the following carefully:

Redemption penalties:

These are fines if you try and pay off the loan early.

Yet for new loans of less than £25,000, redemption penalties are legally restricted to only two months’ worth of interest. Larger amounts have no maximum limit however, and penalties can be much heftier. Many loans have settlement figures of up to 6 months interest for the first few years, then on a sliding scale after this.

The worst that could happen?

You can lose your home! However, thankfully, it is less profitable for most legit secured loan lenders to repossess homes than have the debt repaid. If you mightn’t be able to make a payment, or you get behind with repayments notify the lender immediately. It may be possible to renegotiate the repayment schedule with them. Legally they have to show “forbearance”.

Failure to repay has an immediate negative impact on your credit score, plus lenders’ letters informing of arrears are often charged for, added to your account with interest, effectively a missed repayment penalty. At this point again consider talking to the free debt counselling agencies.

If all fails, the lender will repossess your house, petitioning the court to demonstrate you’ve been unreasonable; refused to sign letters or pay your newer repayment schedule. After that it’ll empty the property of you, your family and your possessions, sell the property (probably at a low price for a quick sale) take what it’s owed and its costs and give you the leftovers (if any).