Risks and Benefits of Secured Loans: What Borrowers Should Know

Thinking about getting a loan but don’t know where to start? You’re not alone – we help more than 170,000 people per month better understand debt and their finances.

There are some risks and benefits to secured loans that you need to be aware of. In this quick guide, we’ll take a look at:

• What a secured loan is
• How they work
• Secured loan benefits
• Potential risks of taking out a secured loan. 

What is a secured loan?

A secured loan is a loan with an asset listed as collateral. This means that your lender can take the asset back if you don’t keep up repayments. Usually, this asset is your property, but you can also list your car as collateral.

Basically, the asset needs to be valuable enough to cover the total value of your loan.

As such, you can only use your property as collateral if you have enough equity in it to cover the value of the loan. This means that you must have paid back enough of your mortgage.

How does a secured loan work?

A secured loan works the same way as other loans. 

You get a lump sum from a lender, which you repay in monthly instalments for a fixed duration. You pay interest on the loan – your interest rate will usually be fixed, but you can get variable rates on some secured loans. 

As long as you make all of your agreed repayments, your secured loan will then be paid off in full, including interest.

Let’s take a look at a quick example. 

You need a secured loan to make some home improvements. You need £15,000 to complete your project, and you have £100,000 equity in your home. This means that you can take out the secured loan and use your property as collateral. 

You use the lump sum to pay for your home improvements, and then you repay the loan in monthly instalments. These monthly instalments will cover the principal and interest of the loan. 

If you want a more detailed example, you can find one here.

What are the benefits of secured loans?

If you are considering getting a loan, you should know that there are some benefits to secured loans.

Larger borrowing amount

All loans come with some risk to the lender – the borrower might not pay back the loan, and then they’d lose money. However, secured loans eliminate some of that risk by using an asset as collateral.

Your lender can seize your collateral if you fail to make repayments. It can then be sold to cover the remaining balance on your loan. 

Less perceived risk usually means they will be willing to lend you more money. You might even find that you can borrow as much as the value of your asset. If you use your home as collateral, you could borrow as much as the equity you have in it. 

Lower interest rates

As mentioned above, less perceived risk means more benefits. Another benefit of secured loans is lower interest rates compared to unsecured loan products. 

However, you need to remember that your financial history, personal circumstances, and a few other factors will strongly influence your interest rate. 

Longer term loans

Generally speaking, unsecured loans have a short repayment schedule, and it’s rare to find one that will last longer than 10 years.

Secured loans, on the other hand, can last much longer – anything from 15 to 30 years. Longer repayment schedules usually mean that you have lower monthly repayments. 

If, for example, you borrowed £40,000 with an interest rate of 4% over 8 years, you would pay roughly £485 per month. However, £40,000 at 4% over 16 years is a monthly repayment of around £280 each month.

That said, older borrowers may be unable to have very long repayment schedules. This is because lenders are generally unwilling to lend money past the national age of retirement.

Credit score boost

Creditors and lenders use your credit score to get an idea of your financial conduct – the higher your score, the more responsible you are with money, so the less perceived risk you have. Lower risk means better borrowing rates. 

Making all of your repayments and sticking to the terms of your loan agreement is a good way of bolstering your credit score. Successful loan repayment shows that you can be trusted as a creditor. 

Secured loans could also be one of your only borrowing options if you have a low credit score. A low credit score means greater perceived risk by your creditors, so using an asset as collateral could be your only way of getting credit.

No specified use

As long as the intended use of your loan isn’t illegal, there isn’t an obvious reason why your application would be denied. You can use your secured loan for any legal purpose you like. These reasons can include:

• Home improvements – many secured loans are quicker and easier to open than a remortgage
• Starting a business venture
• Consolidating your debts
• Making a big purchase like a car. 

Secured loans for all purposes

• Stuck paying high interest on credit card debts & loans?
• Looking to fund a home improvement project?
• Dreaming of finally taking the once-in-a-lifetime trip?

Polly

“This was by far possibly one of the nicest experiences I’ve had getting a secured loan.”

Compare deals

Reviews shown are for Loans Warehouse. Search powered by Loans Warehouse.

What are the risks of secured loans?

As with everything in life, secured loans do have some potential risks.

High fees

Some secured loan brokers can charge quite high fees. Generally, this is around 12.5% of the value of your loan. So borrowing £40,000 could mean you pay around £5,000 in fees. 

Brokers will find you the deal that will suit your circumstances the best. Most banks will require you use the services of a broker before they let you take out a secured loan. 

Collateral can be seized

The terms of your loan are very clear – fail to make your repayments, and your collateral will be seized. While this probably won’t happen after one missed payment, it is still a risk. 

Many choose to use their home as collateral if they have enough equity. This means that missing payments could mean your home is seized. 

Early repayment charges

Many loans will have early repayment fees or exit charges attached to them. These charges exist because your lender makes their profit in the interest they charge you. When you pay your loan back early, you end up paying less interest which means less money in their pocket.

Exit fees combat this shortfall and make sure that your lender still makes a profit. 

However, exit fees can make it difficult for you to move house during your loan repayment schedule if you use it as collateral. Needing to repay your loan when you sell your property and an early exit fee can eat into the proceeds.

Larger borrowing amount

Being able to borrow more isn’t always a good thing. 

The temptation to borrow more is strong, but it could have negative consequences on your finances. You will have to pay back all that you borrowed, with interest, and brokers’ fees too. This can quickly add up, and you could end up paying back much more than you anticipated. 
Think about your long-term financial health and think about if you could realistically keep repaying for 10 or 15 years. Getting some professional advice is always a good idea if you are considering a secured loan.