Secured loans explained
Secured loans can be a way to borrow more, by using your home (or another valuable asset) as security. Understand how secured loans work in our guide with pros and cons to consider
What are secured loans?
Do you want to borrow a large sum of money? A secured loan could be an option for you. To take out a secured loan, you put down a valuable asset (usually your home) as security. As you’re putting your property (or another valuable asset) on the line, there’s less risk for the lender so you may be able to secure a bigger loan and lower interest rate.
While you may be able to access a more affordable loan with less interest to pay, you’ll need to keep in mind the risk that comes with a secured loan. If you struggle to keep up with your loan repayments, you could lose your property.
What is the difference between a secured and an unsecured loan?
When taking out a loan you’ll need to decide between a secured and unsecured loan:
Unsecured loans: These loans are also known as personal loans. Unsecured loans will usually be available to you if you have a fair to good credit score. This is because the stronger your credit score, the more reliable you look to lenders, with less risk of you being unable to pay back the loan. An unsecured loan doesn’t require you to put up an asset as security for the loan.
Secured loan: Secured loans are linked to an asset that you’ll use as security for the loan – meaning if you struggle to repay, the lender may repossess your valuable item (this is usually your home). Secured loans can often be used to borrow larger sums of money than unsecured loans because the lender will have the security of knowing they can reclaim the loan’s value if you fail to repay.
Struggling to decide between a secured or unsecured loan? Our guide on unsecured vs. secured loans can help you to compare.
What to consider before taking out a secured loan?
Before you take out a secured loan, there are a few factors to consider:
Secured to your property: If you fail to pay off your loan you could risk losing your home (or other valuable asset) so make sure you have the income or other funds to keep up with your loan repayments
Your credit score: The stronger your credit score, the better the interest rate you’ll be offered. Looking for ways to improve your credit score? Our free tool, Credit Monitor, can give you tips to nurture your credit rating and watch it grow
What are the different types of secured loans?
There are three different types of secured loans. It’s important to remember that interest rates can change over time and how this could affect your repayments with different loan types.
Variable rate: This is when the loan interest rate changes when interest rates (controlled by the Bank of England) go up or down. So, your repayments could increase or decrease depending on the Bank of England’s base rate – and also what your individual loan provider decides to do. But it means you could end up paying more than you planned to for your borrowing.
Fixed for term: You will pay a fixed monthly repayment throughout your term. Your payments won’t change which can make it ideal for budgeting.
Short-term fixed rate: You will pay a fixed monthly repayment for a short term (normally between one and five years). After that time has passed, your rate will change to the lender’s variable rate which means your payments could increase or decrease.
What are the pros and cons of secured loans
As with any big financial commitment, there are upsides and downsides to taking out a secured loan.
Pros
Borrowing larger amounts: As your loan is secured by your home (or another valuable asset), you may be able to borrow larger amounts of money with a lower interest rate compared to unsecured loans. Lenders might be prepared to loan you more if you can put up your home as security. This is because they can repossess and sell to recover any losses should things go wrong and you cannot repay
Building your credit score: If you meet your monthly repayments on time, you should see your credit score improve, which can give you more credit options and better interest rates in the future
More time to pay back: You may have the option to pay back your loan over a much longer period than with an unsecured loan. While you may pay more interest, your monthly repayments should be lower
Cons
You could lose your home: With a secured loan you are putting up your property (or another valuable asset) as security on your loan. If you fail to make the repayments, your house could be repossessed. This is why it’s important to carefully consider your financial future before agreeing to take out a secured loan. Ask yourself if you’ll be realistically able to make these payments for the duration of the loan
Early repayment fees: Some lenders will charge you a fee for paying back your secured loan early. Not all lenders do this, so it’s important to check your lender’s policy thoroughly
Paying more interest overall: With a secured loan, you can spread your payments over a longer period. However, it’s important to remember you might end up paying more interest overall because of this
Can I get a secured loan with bad credit?
Yes, you can get a secured loan with bad credit. Although your credit score might stop you from getting the best interest rates, a secured loan provides less risk for the lender.
What happens if I pay back my secured loan early?
Before deciding to pay back your secured loan early, find out if any early repayment charges apply. Lenders levy early redemption charges (ERCs) to cover lost interest on your loan if you want to pay it back earlier than originally planned.
What are the alternatives to secured loans?
Looking to borrow but unsure if a secured loan is right for you? There are alternatives to consider, including:
Unsecured loans: Unsecured loans, also known as personal loans, don’t need you to use a valuable item, such as your property as security. They’re similar to secured loans in that you can build up your credit score if you manage them well, and you’ll pay back the money you owe in fixed monthly repayments. But you may not be able to borrow as much as you would with a secured loan
Credit cards: If you’re looking to borrow some cash but don’t want to take out a loan, you could opt for a credit card instead. Like a loan, you’ll borrow money from a bank, building society or other lender and pay the money back over a period of time with interest added on top. Credit cards tend to work best as a short-term way to borrow smaller sums
Guarantor loans: This is a loan usually aimed at people with bad credit. Guarantor loans work by someone promising to pay off a debt for you if you can’t.
Other helpful guides
Here at MoneySuperMarket, we have a range of detailed guides to help you understand more about loans:
How to get a loan with poor credit
Compare secured loans with MoneySuperMarket
Taking out a loan can be a difficult process to navigate so we make comparing easy. Whether you’re after a secured loan or a personal loan, we’ll give you a tailored list of options to choose from - and searching won’t affect your credit rating.
Simply tell us a little about your financial situation and what kind of loan you’re looking for, including what you’ll be spending the funds on, and we’ll give you a list of competitive offers. Once you’ve decided, you can click through to the provider and get the process started. To get a secured loan, you will need to be a homeowner.
MoneySuperMarket is a credit broker – this means we’ll show you products offered by lenders. We never take a fee from customers for this service. Instead, we are usually paid a fee by the lenders, but the size of that payment doesn’t affect how we show products to customers.