Understanding Types of Secured Loans: Basics and Key Considerations
Representative example: If you borrow £34,000 over 15 years at a rate of 8.26% variable, you will pay 180 instalments of £370.70 per month and a total amount payable of £66,726.00. This includes the net loan, interest of £28,531.00, a broker fee of £3,400 and a lender fee of £795. The overall cost for comparison is 10.8% APRC variable. Typical 10.8% APRC variable
Representative example: If you borrow £34,000 over 15 years at a rate of 8.26% variable, you will pay 180 instalments of £370.70 per month and a total amount payable of £66,726.00. This includes the net loan, interest of £28,531.00, a broker fee of £3,400 and a lender fee of £795. The overall cost for comparison is 10.8% APRC variable. Typical 10.8% APRC variable
Want to take out a secured loan but don’t know where to begin? You’re not alone – we help more than 170,000 people each month better understand debt and their finances.
Secured loans can be complicated to understand. In this quick guide, we’ll take a look at:
- What a secured loan is
- How they work
- The types of secured loans that are available.
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 types of secured loans are there?
There are a few different types of secured loans available. We recommend that you do some research to work out which would work best for you – don’t hesitate to get professional advice if you need it!
Homeowner loans
Homeowner loans use your home as security or collateral if you fail are unable to repay all of your loan. To be eligible, you need to have enough equity in your home so that it’s equal to the value of the loan you want to take out.
Debt consolidation loans
If you have lots of unsecured debts, you could use a debt consolidation loan to lower your monthly outgoings.
You use the loan to pay off your debts in one go; then, you only have to make one monthly repayment. This usually works out cheaper than making multiple payments with multiple interest rates. You can contact a debt charity for some free advice if you are considering a debt consolidation loan.
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?
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Mortgages
Perhaps the most infamous type of secured loan is a mortgage, which is a secured loan for the purchase of land or property.
You put down a deposit, and then a loan from your mortgage provider pays the rest. Your property can be repossessed if you don’t keep up repayments.
Second charge mortgages
A second charge mortgage is separate from your original mortgage that you used to buy your property. It’s similar to a homeowner loan in that you use the equity in your property as collateral, but it’s usually used for home improvements.
Bridging loans
Bridging loans could be a good option if you are about to purchase your next property but haven’t yet sold your current home. You use the equity in your current home as collateral and use the loan as a deposit for your second.
Guarantor loans
If they are eligible, you could ask a family member or friend to act as your guarantor. They will have to pay your loan off if you fail to make your repayments. Some loan providers will require that your guarantor offer an asset as security or collateral.