If you have been wondering how to get a secured loan in the UK, this new MoneyNerd guide is for you. Below we have discussed all the important aspects of secured loans and how you can go about getting one – and if you should.
Use the guidance below to inform your decision and avoid any potential pitfalls.
What is a secured loan?
A secured loan is a loan that is secured with an asset, meaning the asset is listed as collateral within the loan agreement. This provides more assurance to the lender and means you are less of a lending risk.
By listing an asset as collateral, you are giving permission for the loan company to repossess and sell that asset in the event that you stop making your monthly payments, which could occur due to loss of employment or an accumulation of other debt that makes monthly repayments unaffordable. If this occurs, the lender seizes and sells the asset and then uses the money from the sale to pay off your debt, including interest and late fees. Any money remaining from the sale of the asset will be given back to the debtor to keep.
All of this can be avoided if the borrower makes all their monthly repayments in full and on time as agreed. The loan will be paid off after a fixed period of time, as agreed at the start. You might be able to pay back the personal loan early, although this could incur an early repayment charge.
There are many types of secured loans. Some are secured against property and home equity, while others are secured with cars or something else. Taking out a secured loan is a risk and you should think carefully before securing any debts against assets, especially securing debts against your home.
What is the opposite of a secured loan?
The opposite of secured loans is unsecured loans, which you may wish to consider if you feel uneasy about using an asset as collateral. However, this may restrict the amount you want to borrow or mean paying a higher interest rate.
Unsecured loans do not use any assets as collateral within the credit agreement. If you fail to keep up repayments on an unsecured loan the lender can chase you for the debt for many years and even take you to court. In court, they can ask a judge to allow debt enforcement, which may include using bailiffs to repossess personal belongings that are then sold. This process can be time-consuming and costly for everyone.
So, just be aware that using an unsecured loan will not get you out of the woods if you cannot repay. You might still have possessions seized and sold to recover the arrears.
What do you need for a secured loan?
To be approved for a secured loan you must first meet the eligibility criteria to apply. Each lender will have their own criteria, but most usually ask you to be of a certain age, have a certain asset you are willing to use as collateral and be a UK tax resident. You may also have to take out a minimum loan amount. You shouldn’t overborrow without good reason.
What does a secure loan require?
A secured loan requires you to be prepared to use an asset as collateral. Therefore, you must own the asset in your name and be willing to have it repossessed and sold if you cannot pay the loan back. Most loans of this kind allow you to use property, home equity or vehicles as security. Some other loan providers may allow you to use other assets.
But it’s not just about having an asset. Your application will be subject to an affordability check where the lender calculates how much of your income is needed to pay back the loan and any other debts. If they believe you would need to use too much of your income on all debts and therefore make essential living expenses difficult, you will be rejected. All applicants’ credit files will be checked to see how finances have been managed in the past.
Examples of a secured loan
To illustrate the length and breadth of secured loans, here are some examples:
- Generic secured personal loans – these secured loans use all types of assets as security and can provide a loan amount beyond what is offered through an unsecured loan. The money can be used for any purpose.
- Home equity loans – also known as a homeowner loan or second charge mortgage, these loans are secured with home equity and can be used for any purpose.
- Secured home improvement loans – usually secured with a property or home equity, these loans are used to make home improvements.
The pros of using a secured loan
Loans secured with an asset unlock benefits that are not possible using unsecured loans.
Arguably the greatest advantage is that a secured loan will potentially allow you to borrow more. An unsecured loan typically allows you to borrow up to £25,000 with most lenders whereas secured loans can be for more than double this amount – and vastly more if it is secured with property or home equity.
Another benefit of using a secured loan is that it could help you get a lower interest rate, depending on your finances and credit history. Because the lender views you as less of a lending risk, they can offer competitive interest rates.
But it is important to remember that there are also drawbacks to getting a secured loan. Your asset is at risk and you may be subject to additional loan fees, namely appraisal costs and closing costs. These should be accounted for when you compare loans.
Do banks offer secured loans?
UK banks offer secured loans and usually offer some of the lowest interest rates to people with a good credit score. You can find different types of secured loans through a UK bank.
You don’t have to use a bank to apply for a secured loan; these loans are also offered by online loan providers and some building societies. Whichever lender you consider, make sure they are legitimate and legal. To be a legal lender in the UK they must be authorised and regulated by the Financial Conduct Authority (FCA).
How to get a loan secured against your house
There are multiple types of secured loans that allow you to use your property or home equity as collateral within the loan agreement, namely home loans, second charges and home equity loans or HELOCs. These types of secured credit can enable homeowners to borrow a significant sum of money that they would not get from any other loan or credit card.
You can work out your home equity by subtracting your remaining mortgage balance away from the current market value of your home. Most lenders will allow you to borrow against 80% of your home equity at most. Seek advice before going down this route.
Is it easy to get a secured loan?
Secured loans are considered a little easier to get compared to an unsecured loan.
This is because you are deemed less of a lending risk with an asset on the line and the lender knows it can more easily and cheaply recover the debt if you do not keep up with your ongoing monthly repayments.
Yet, your application will still need to be assessed and approved. You can still be denied the loan.
How to get a secured loan in the UK
As mentioned previously, you can get a secured loan in the UK from high-street banks, which are advertised on their websites. You can also search for these loans online and find an array of lenders offering these loans. In general but not exclusively, the higher interest rates are found with online lenders compared to banks, but they may be easier to get approved for.
You should also be aware that some supermarkets and even the UK Post Office offer secured credit. These loan providers can offer competitive rates. You should always do your own research and engage with a broker if you need support. You may be charged a broker fee or have to pay a commission.
What documents do I need for a secured loan?
When you apply for secured credit, you will need to provide many documents that either prove your identity, your asset and its worth, your income and any existing debts. You may have to provide copies of:
- Your passport and driving license
- Your payslips and employment contract
- Proof of ownership of an asset and proof of its worth (you may need a new appraisal or valuation)
- Proof of your existing debt repayments, possibly existing mortgage payments or the credit agreement for each one
What credit score do I need to get a secured loan?
Each lender can use its own affordability checks and credit score assessments. Thus, there is no fixed credit score required to get approved across all lenders. To get a competitive interest rate, you’ll need to have a good or excellent credit history. Otherwise, you can expect to pay more interest or be rejected.
Is it bad to get a secured loan?
Taking out secured credit can be an advantageous way to access larger loan amounts at competitive rates. Some people consider it a bad idea because there is an element of risk, especially when we cannot predict the future.
In reality, it is neither bad nor good but everyone should consider their personal circumstances and alternatives to a secured loan, especially if you have a good credit score.
How can I get a secured loan?
You should start your search to get a secured loan by deciding if this type of loan is right for you. If so, you should check your credit score to ensure there are no errors recorded and then start searching the market, using loan calculators as a guide only.
If you have any questions throughout the process, head back to MoneyNerd and search your question on our site. A new stack of secured loan articles have just landed and there is a good chance we’ve answered your query already!