Once you’ve decided that a secured loan is the best credit option for you, naturally the next question is where can you get the best secured loans? This easy-to-read guide will provide an overview of secured loans before answering the most common relevant questions and then discussing the best secured loans.
Before you apply for a secured loan in the UK, you need to learn about what’s below.
What’s a secured loan?
A secured loan uses one of your assets as collateral in case you stop paying the loan back, which usually occurs after a change in circumstances making it difficult to afford monthly repayments. The asset used as security in most secured loans is a property or home equity, meaning your home may be repossessed and sold if you don’t keep up repayments.
You should think carefully before securing debts against your home or any other valuable asset. And only compare secured loans between lenders that are authorised and regulated by the Financial Conduct Authority (FCA).
Examples of secured loans
There are many types of secured loan that are used for various purposes or use different assets as collateral. Here are some of the most common, which you’ll probably have heard of before.
- Secured personal loans – this type of secured loan is a generic loan that can be used for any purpose. It is usually secured with a house or car.
- Homeowner loans – also known as home improvement loans, a homeowner loan is secured and borrowed against home equity for the purpose of home improvements.
- Second charge mortgages – also known as homeowner loans, home equity loans or home equity lines of credit (HELOC), are secured with home equity and can be used for any purpose.
- Debt consolidation loans – this type of loan is available as a secured or unsecured loan and must be used to pay off other debts as per the process of debt consolidation.
- Guarantor loans – used by someone without any assets to secure a loan using the guarantor’s pledge to pay if the borrower does not, but usually requires the guarantor to use his/her home as security too.
How does a secured loan work?
Most of the secured loans listed above work in an identical way by providing the borrower with a lump sum of money that must be repaid over an agreed loan repayment period made up of monthly repayments. Some secured loans, such as a HELOC, don’t work this way and release the loan in stages over a draw period.
Monthly repayments include a repayment on the loan amount and an interest payment. If your finances improve, you may choose to pay off a secured loan early. This is a possibility, but keep in mind that paying off a secured loan early usually means having to pay early repayment fees.
If you cannot meet your monthly repayments, you should communicate your financial difficulty with the lender. Lenders are likely to renegotiate your monthly repayments so they are more affordable but last longer. If you do not do this, payment defaults will be registered on your credit file, reducing your credit score. But more worryingly, your listed asset can be seized and sold to pay off any arrears and the remaining cost of the loan.
How are secured loans different from unsecured loans?
Loans can be divided up into secured and unsecured loans. Whereas a secured personal loan requires an asset to be used as collateral – as described above – an unsecured loan does not. When you take out an unsecured loan, you do not need to have any assets valued or list them as security within the credit agreement.
This is the main difference between a secured and unsecured loan. However, the fact that one uses an asset as security and the other doesn’t creates some further differences for many people. The asset reduces your lending risk and enables the lender to offer more credit through a secured loan in comparison to an unsecured loan. And the interest rates may not be as competitive (not always the case!).
It’s important to point out that just because you don’t use assets as security in an unsecured loan agreement, doesn’t mean you can get away with not repaying the loan. Although the lender doesn’t have the right to take any of your assets, they can take you to court for not paying. A judge could give permission to enforce the debt with bailiffs, who would repossess your valuables and sell them, which incurs even more costs.
Are secured loans easier to get?
It is generally considered a little easier to get a secured loan compared to unsecured loans. By securing the agreement with a valuable asset, the lender feels more comfortable to lend to you for the simple reason that they can recover any future arrears much easier.
However, taking out a secured loan still requires an assessment of personal finances and a credit rating check. If you have a low credit score and bad credit history, you could be denied the loan.
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Is a secured loan a good idea?
A secured loan could be a good idea if you want to access a larger loan amount that is not available through an unsecured personal loan or credit card. This is usually the case if you want to pay for home improvements, renovations or for debt consolidation purposes. You may be able to borrow more and receive a competitive interest rate.
However, using a secured loan comes with the additional risk that your asset is on the line. If your personal finances change unexpectedly, your asset may be repossessed.
You can mitigate some of the risks attached to a secured loan by sourcing the best secured loans with the lowest rates and fees. These cheaper loans may be more manageable should you go through a financially unstable patch.
Which banks offer secured loans?
Most UK banks offer all of the secured loan types mentioned earlier in this guide – and others. Sometimes these loans are advertised on the bank’s website where you can access specifics about the loan and maybe even apply for the loan. But some banks don’t provide specific details about these loans online and ask potential customers to enquire in branch, possibly by making an appointment first.
Some of the best secured loans – i.e lowest interest rates – are usually but not exclusively available through banks. As you compare loans to find the best rates, make sure you check out all the high-street UK banks, either in person or by visiting their website.
What companies offer secured loans?
Along with UK banks, a number of online loan providers advertise secured loans in the UK. Some online websites advertising secured loans are a broker, not a lender. This means they use your information to search through a vast number of partners to find a loan you may be approved for.
Although this can be good in some regards, you may miss out on the best secured loans if they are not partnered with the best loan lenders. Your loans could cost more by using a broker due to hidden fees, and as you repay the loan you may actually be paying some sort of commission.
If you decide to apply for a secured loan with an online lender, make sure you only apply to ones that are authorised and regulated by the Financial Conduct Authority. You might also find these loans advertised by building societies, mortgage specialists and even supermarket finance departments.
Where is the best place to get a secured loan?
Although banks typically have lower representative interest rates than online loan providers, there are still some online companies that offer equally or even better representative example rates than some banks. You’ll need to search and compare loans across the market to get the best deals.
However, notice that “representative” is mentioned above. The best place to get a secured loan for one person may not offer the best deal for another person. The interest and terms of a secured loan can differ with the same lender because offers are made based on personal finances and your credit score.
What are the best secured loans interest rates?
The best secured loan interest rates depend on the amount you want to borrow. What is considered a low-interest rate for one amount may not be the lowest on the market if borrowing a significantly different amount. Nevertheless, the lowest interest rates on secured loans are between 2% and 5%. Getting a secured loan with an interest rate below 10% is considered a good deal for most people.
Some loans come with a fixed rate of interest that remains the same throughout all your monthly payments. But others use a variable interest rate that can change up to eight times per year based on the economy and the Bank of England base rate, as decided by a committee at the Bank of England known as the MPC.
What are the best secured loans?
The best secured loans are decided by two main factors:
- The current market
- Your personal situation
The loan market can change rapidly and change which lender is offering the lowest representative rates. And your personal situation will always determine if you can get offered the lowest rates.
Thus, it is not possible to straight up answer this question, but it is recommended to check out the big banks as they often have low representative rates and you know they’re a direct lender without fees hidden in monthly payments.
What to consider when looking at secured loans?
When looking for these loans, it’s important to look at more than just the interest. Of course, the rate of interest is important and will influence the overall cost of the secure loan, but it’s not the only thing to look for. You should also check:
- Closing costs – some loans have a closing cost between 2-5% of the total loan amount, meaning a significant final payment is needed to end the loan on bigger loans.
- Early repayment fees – if you might pay back the loan early then check what charges are payable to do this before you take out a secured loan.
- Appraisal fees – the lender may want to value the asset being used as security, and there may be fees to pay as part of the process.
- Additional loan or admin costs – some secured loans have additional fees, often related to administration processes.
How to compare secured loans
To compare secured loans and find the best secured loans at the time of reading, you should do updated research on the market. You might want to start off by using a third-party comparison website, but then progress into your own independent research.
Create a spreadsheet to keep track of the different representative rates advertised as well as the four possible additional loan costs above. This will help you make easy and accurate comparisons.
Secured loan calculators
Secured loan calculators are a great way to see how much your loan repayments will cost. These are found on lender websites and allow you to enter how much you want to borrow and the length of time needed to repay. They will then show all the secured loan costs and how much monthly payments will cost.
But be aware that they are not entirely accurate and your repayments could be different. They are based on a 51% average only.
How much can I borrow with a secured loan?
Most secured loans are available from between £3,000 to £100,000, whereas unsecured loans usually offer credit from as little as £500 to a maximum of £25,000. This means you can borrow much more using a secured loan, but you could borrow smaller amounts with an unsecured loan.
There are some secured loans that could allow you to borrow even more than £100,000. Those that borrow against home equity may enable even bigger borrowing.
Homeowners can sometimes borrow as much as 80% of their equity. If you were to have £200,000 equity, this means taking out a secured loan for above £100,000 is easily possible, but it will depend on personal finances and whether you have a good credit score or a poor credit rating.
Can you get a secured loan with a bad credit score?
Having a low credit score can make it more difficult to get approval for any type of loan, but someone with a poor credit score can still get approved for secured loans. Some companies will even advertise their loans specifically to credit seekers who have a low credit score.
Moreover, there is no minimum credit score you must have to apply and each lender will use its own affordability and lending risk tests.
Is a secured loan right for me?
If you meet the lender’s eligibility criteria and own an asset that is required to secure the loan, a secured loan could be the best way to borrow money. It may allow you to borrow more than through another type of loan. However, there may be other credit options that provide equal or better terms without having to risk losing your home.
If you feel worried about the prospect of losing your home, you may want to consider an alternative credit option. Get advice by speaking to free money advice groups and debt charities like Step Change.
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