A secured personal loan could be the solution to accessing a larger amount of credit in comparison to unsecured loans. In this guide, we cover all the essential information you need to know before you start searching for secured loans in the UK. 

Before deciding to get a secured loan, you need to hear this! 

What is a secured personal loan?

A secured loan is a loan that lists an asset as collateral in the event the loan goes unpaid. The opposite of a secured loan is an unsecured loan, which does not list any asset as collateral within the credit agreement. 

A secured personal loan is generally considered as a generic secured loan that can be used for any purpose. 

How does a secured loan work?

A secured loan provides the individual(s) with a lump sum amount that must be repaid with interest over a fixed period. This is done through monthly repayments, and the time you get to repay will be determined by the loan amount and personal circumstances. The loan is fully repaid once all repayments have been made as agreed. If you want to repay the loan early, you could be subject to early repayment fees. 

However, if you cannot keep up repayments on the secured loan, the lender can seize any asset listed as security within the secured loan credit agreement. The lender can then sell the asset and use the money raised to recover all the debt owed to them, inclusive of capital, interest and any late fees that may have been applied. If the asset sells for more than the value of the arrears, this money is returned to the debtor.

You should think carefully before securing a loan with an asset. And you should only consider secured loans from lenders that are authorised and regulated by the Financial Conduct Authority (FCA). 

What is the difference between a secured and unsecured loan?

The most significant difference between a secured loan and unsecured personal loans is that the former uses an asset as collateral in the agreement and the former does not. 

However, this does not mean you can get away with not paying an unsecured personal loan. If you do not pay this type of loan, you can still be chased for the payment, your credit score will be affected – and the lender can even take you to court and get a judge to make you pay. If you ignore the judge then enforcement action can be taken, not limited to seizing your assets through the use of bailiffs.

How much can I borrow with a secured loan?

Secured loans typically allow individuals to borrow more than unsecured loans. This is because the asset is used as security. 

By using an asset with significant value, you could borrow much more than an unsecured loan. The average limit of an unsecured loan is around £25,000, whereas a personal secured loan can be tens of thousands of pounds more, subject to personal finances and your credit score. 

Some secured loans allow you to borrow specifically against the value of the asset. For example, a home equity loan is a loan secured against your home equity. The maximum loan you can borrow in this case is around 80% of your equity, which can be a considerable sum of money and well over £100,000 in some cases. 

However, securing debts against your home is risky. Your home may be repossessed and sold to recover the debt and pay off any existing mortgage. The thought of losing your home may be enough to put you off borrowing against the equity in your home. 

What can a secured loan be used for?

A secured personal loan is a type of generic secured loan that can be used for any purpose. Many people use personal secured loans for the same handful for reasons, namely:

  1. Debt consolidation – merging multiple debts together into one new debt with a lower interest rate.
  2. Home improvements – using the money to redecorate or renovate part of a home. 
  3. Paying for cars and holidays – as stated.
  4. Private medical and education costs – the money is used to fund cosmetic surgeries or private healthcare, or even private schooling and university fees.

Some secured loans can only be used for specific purposes. For example, a second charge mortgage which may also be known as homeowner loans or home equity loans, is secured against home equity and can be used for the same reasons listed above. 

On the other hand, you can get secured debt consolidation loans and secured home improvement loans, which can only be used for the reasons their name suggests. 

What is the interest rate on loans secured with an asset?

Loans secured with an asset usually offer a better interest rate compared to an unsecured loan. However, this may not always be the case. You might get a competitive rate with an unsecured loan if you have an excellent or really good credit score. 

The interest may be a fixed rate or variable rate dependent on the Bank of England base rate among other things. On average, the best rates are usually between 2% and 10%. Getting a secured loan is preferable for this reason, but you should also watch out for other fees and loan charges which can make these loans more expensive than at first glance. 

Are secured loans a good idea?

A secured personal loan can be an advantageous way of getting credit if you want to use an asset as collateral to possibly access a larger loan amount or to get a lower interest rate. However, you should also fully understand the risks involved. 

Some consider it a bad idea due to the added risk, especially when loans are secured against a family home and you could lose your home. 

Where can I get a secured personal loan?

Secured loans are widely available from banks, building societies, online loan companies and online banks. You will need to search and compare your options to find the deal that is right for your needs. As previously mentioned, only consider a lender that is authorised and regulated by the Financial Conduct Authority. Other lenders are operating illegally in the UK and could be a scam. 

Be aware that some companies are a broker not a lender. They may appear as though they are a direct lender providing you with the loan, but they are in fact a middle-man company taking a cut or commission on monthly repayments. 

What is a secured personal loan calculator?

A secured personal loan calculator is an online financial calculator designed to help you compare secured loans. The calculator will allow you to enter the amount you want to borrow over a fixed period and show you what your monthly payments will be including interest. 

These calculators use the lender’s representative APR, which is the rate that just over half of successful applicants received. Thus, they are not accurate for nearly half of people considering the loan, especially if you have poor credit history. 

If you need help to compare loans, you might find comparison websites useful, or you may prefer to use commercial services. 

Is it easier to get a secured loan than a personal loan?

It is considered a little bit easier to get a secured loan over an unsecured personal loan. By having a loan secured with an asset, it makes the process of recovering an unpaid debt by the lender quicker, easier and less costly. Therefore, you are considered less of a lending risk by the lender when choosing secured loans instead. And that means it is a little easier to be approved for these loans. 

However, when you apply for a secured loan, your income and debts will be analysed as part of affordability checks. Your credit history will also be assessed to see how you managed finances in the past. If you fail any of these checks then you will be denied the loan, even if it is secured. 

What credit score do I need for a secured personal loan?

There isn’t a fixed credit score you must have to be approved for a secured loan. Each lender applies its own independent affordability tests and assesses your credit score in its own way. One lender may deem your score too low for a secured loan, whereas another one will approve someone else with the same score. 

That being said, you should aim to have at least a fair or good credit score to get the better interest rates. You can check your score before applying by using a credit reference agency, many of which offer free trials but do remember to cancel or you’ll be enrolled into a subscription service. If you see any errors make sure you flag them with the relevant lender. Mistakes happen all the time and your credit score could be negatively affected. 

Can you get a secured personal loan with bad credit?

Those with a bad credit rating may still be able to get a secured personal loan. The loan you are offered is likely to have a higher interest rate because you are seen as a greater lending risk. The fact you’re using an asset as collateral makes it more likely you will be approved with bad credit in comparison to an unsecured loan. 

There are even some lenders who offer secured loans to people with bad credit and advertise them as such. You might be more likely to be accepted when applying for a bad credit secured personal loan. 

More on secured personal loans

If you want to know more about secured loans in the UK, do not hesitate to check out new MoneyNerd guides soon. 

All our content is free and made to make confusing financial processes easy to understand. Search your secured loan questions on our site to find relevant guides today. 

About the author

Scott Nelson

Scott Nelson is a financial services expert, with over 10 years’ experience in the industry, including 6 years in FCA regulated companies. Read more
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