Here, we explain the pros, and the cons, of secured loans and offer some tips on getting the best possible deal for your circumstances.
What is a secured loan?
With a secured or homeowner loan, you use your property as security against the amount you borrow.
Lenders are happy to lend more over a longer period than they will with unsecured, or personal, loans as a result.
And that means you can generally borrow up to between £50,000 and £120,000 over a maximum term of 25 years.
As with personal loans, the repayment terms will generally involve fixed, monthly payments and you will face early repayment penalties (see below for an explanation of how these work) if you want to pay the loan off before the agreed term.
What are the advantages?
Secured loans can prove easier to qualify for than unsecured borrowing – mainly because the lender concerned knows it can reclaim any losses from the sale of your property should you default.
If you have a less-than-perfect credit file, a secured loan may therefore prove your only option.
As mentioned above, secured loans are also a useful way of accessing larger amounts of say above £25,000.
Few unsecured lenders will allow you to borrow above this amount, while the lowest rates are often reserved for those who borrow no more than £15,000.
Secured loans can also be paid back over a longer timeframe.
You can, for example, obtain a secured loan over 25 years.
With unsecured loans, on the other hand, most of the best deals require you to repay the full amount within about five years.
What are the disadvantages?
While the interest rates on offer to secured loan customers with good credit scores are low, those available to unsecured loan borrowers with similar credit histories are lower still.
At the time of writing you can shave almost 2% off your loan rate by going for the market leading unsecured loan rather than the best secured deal.
The penalties if you become unable to repay a secured loan can also be more onerous – notably if your home is repossessed and sold off to clear your debt.
And you are unlikely to find a secured loan offering the flexible features, such as overpayments and payment holidays, now available from some unsecured lenders.
The bad news for people with low credit scores, meanwhile, is that – as with unsecured loans – the lowest interest rates are reserved for borrowers with higher scores.
While a secured loan may be available as long as you own your own home, you may therefore end up paying more than double the interest charged on the market-leading deals.
Is a secured loan right for me?
First things first, you will not qualify for a secured loan unless you own your own home.
If you are not a homeowner, there is therefore no point applying for a loan of this kind.
Those looking to borrow smaller amounts may also be better off with a personal loan, especially if the amount required is £15,000 or less.
The general rule of thumb is that an unsecured loan is probably a better choice unless you need to borrow a very large amount, require a long repayment period or will not qualify for an unsecured arrangement because you have defaulted on debts before or are self-employed, for example.
Either way, check the interest rate (often called the representative APR – see below for an explanation) as well as any charges, such as early repayment or arrangement fees, that could affect the overall cost of the loan before making your choice.
What is the representative Annual Percentage Rate (APR)?
The representative APR quoted in loan advertisements is the headline interest rate figure the lender uses for marketing purposes.
This does not mean that everyone who is accepted as a customer will pay that rate, though.
Under current European Union rules, lenders only have to offer the “representative” rate to 51% (or more than half) of the people they take on as borrowers.
If your credit score is lower than the average, you may therefore be only accepted as a customer if you agree to pay a higher interest rate.
This process is called risk-based pricing and is designed to ensure that borrowers who pose the lowest risk to a lender (or in other words are the least likely to miss payments) pay the lowest rates.
What are early repayment penalties?
Early repayment penalties, otherwise known as redemption fees, are generally charged when borrowers want to repay their loans before the agreed term.
Lenders impose them as a source of compensation for the interest payments they miss out on due to the loan being cleared in a shorter time.
A typical penalty could be equivalent to one or two months’ interest, although the penalties charged will often start to fall as you approach the end of the loan agreement.
Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.