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What is a secured loan?

Secured loans explained

Secured loans can be a way to borrow more, by using your home (or other valuable asset) as security. Understand how secured loans work in our guide with pros and cons to consider.

 

By Lucy Hancock

Published: 15 October 2021

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What is a secured loan?

Looking to borrow a larger sum of money? You may prefer to take out a secured loan. A secured loan, also known as a homeowner loan, is a type of loan that uses a valuable asset (usually your home) as security. As you’re putting your property (or other 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.

How does a secured loan work?

Secured loans work in a similar way to personal loans. You’ll be charged interest on the amount you borrow – usually at a fixed rate – and you’ll pay the same monthly repayment for the term or life of the loan until the debt is paid off in full.

A key difference is the interest rate you’ll pay on a secured loan is likely to be lower than for a personal (or unsecured) loan. This is because you’re being asked to put up security against your borrowing, so it is less risky for the lender. Most secured loans use your home as security, but in some cases, a valuable item such as a car or jewellery can be used. As long as you keep up with your monthly repayments (both on time and in full), you won’t lose the asset.

What can I use a secured loan for?

Secured loans are used for a variety of large purchases, including:

  • Home renovations: Looking to spruce up your kitchen or have an extension on your home? A secured loan could help spread the cost over time
  • A holiday: Planning a cruise or round the world adventure? A secured loan could help make the cost of a holiday more affordable
  • A wedding: Your wedding may be the best day of your life, but it can also be an expensive one! You could manage the cost of your big day into monthly repayments with a secured loan
  • To help finance a car: If you’re eyeing up new wheels but can’t afford to buy the car outright, you could consider spreading the cost with a secured loan

While you can take out a secured loan for various purposes, with MoneySuperMarket you can only use your loan for home improvements or to consolidate existing debts.

Secured loan graphic

What can I secure my loan against?

When applying for a secured loan, you’ll be asked what item of value you’d like to use as security (or collateral) for the loan. Here are some examples of what you could use to act as security for your loan:

  • Your home: Using your home is one of the most popular ways to secure your loan. You can only take out a loan against your property if you own all or part of your home (known as the equity in your property)
  • Your car: Taking out a loan against your car is known as a ‘logbook loan’. When you take out a loan against your vehicle, you’ll be asked to give your vehicle’s registration document or logbook to the lender for the duration of the loan. The value of the loan will be based on the value of your car – so how much you can borrow may vary
  • Your savings: You could use cash you have in a savings account to act as security for your loan – this is called a savings-secured loan
  • Jewellery: You may choose to use your jewellery or valuable antique as security for a loan - it’s likely that the item will needed to be valued first

When you compare loans with MoneySuperMarket, you’ll only be able to use your home as security for your loan.

What happens if I can’t pay back my secured loan?

What happens when you can’t pay back your secured loan will depend on the severity of your situation and how many repayments you miss. If you are struggling to meet one repayment, it’s best to contact your lender straightaway and explain your situation as soon as possible. Your lender may offer you breathing space, in the form of a payment holiday or reduced repayments – but this can vary depending on your situation so make sure you check with your lender.

If you struggle to repay your secured loan, you may be faced with a higher interest rate and late repayment fees, which will add to your overall debt. . If you miss several repayments (usually three to six) a default may be registered on your credit file which can affect your credit score.

The main risk or concern with secured loans is your property or valuable asset could be repossessed if you fall behind with your repayments. Your lender may force the sale of your home to recover the money you owe them – but this is usually a last resort.

As with any loan or borrowing, it’s important to make sure you can afford to pay it back before you apply.

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. An unsecured loan, also known as a personal loan, will usually be available to those with 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.

In contrast, 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. 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 do I need 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
  • Paying the loan back early: Make sure you’re aware of any early repayment charges that will be applied if you want to pay your secured loan back early. 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 advantages of getting a secured loan?

The potential advantages of secured loans include:

  • Borrowing larger amounts: As your loan is secured by your home (or other 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

Alternatives to a secured loan

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

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.

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MoneySuperMarket is a credit broker – this means we’ll show you products offered by lenders. We never take a fee from customers for this broking service. Instead, we are usually paid a fee by the lenders – though the size of that payment doesn’t affect how we show products to customers.