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Frequently Asked Questions About Secured Loans

When it comes to borrowing money, there are tons of options out there. But, finding the right type of credit for you can be a minefield of jargon, interest rates and repayment terms. One way to borrow that you might be considering is secured loans, which are only available to those who own their home. But, what are they? How do they work? In this guide, we’re answering all the questions you might have about secured loans. The information in this article is just that – general information. It’s not intended as advice and we always recommend having a chat with an adviser if you need help deciding if a secured – or any – loan is the right type of borrowing for you.

Let’s make a start, shall we?

What is a secured loan?

A secured loan is a type of borrowing that requires you put up something you own as “security” in case you don’t or can’t repay what you’ve borrowed. Usually, the asset you’ll secure your borrowing against is your home, which makes the loan a type of mortgage. Secured loans have a few names. Other names they often go by are homeowner loans or home equity loans, because of the link they have to your property. So, if you hear these names, know they’re talking about the same thing!

What collateral can you use for a secured loan?

Secured loans use your home as the asset (or collateral, if we’re using the finance-y word) that your borrowing is secured against. You can sometimes find loans that are secured against a different asset of yours. Logbook loans use your car as the asset you borrow against, and pawnbroking allows you to borrow using personal items like jewellery as an asset. That you use something to secure your borrowing with these types of loans can cause a bit of confusion. But they are a different type of borrowing to what is generally meant by secured loans.

Are secured loans easier to get?

If you already own your home, then secured loans can seem like they’re easier to get than the other types of borrowing available to you because tying your borrowing to your home means that you don’t necessarily have to have a brilliant credit history to be approved.

Every time a lender approves a loan application, they’re taking a risk that the person on the other end of that application may not pay them back. While lenders offering unsecured loans manage this risk by having strict acceptance criteria or charging high interest rates, lenders offering secured loans do things a little differently.

Securing your borrowing to a home that you own minimises the lender’s risk by giving them another option to recover the money they gave you if you later can’t or don’t repay it: repossessing your home. That doesn’t mean they don’t also have acceptance criteria – they do – but it does mean secured loan lenders may still be able to help you, even if you’ve been turned down for other types of credit.

Why are secured loans cheaper?

Secured loans often have lower interest rates than their unsecured counterparts. This is for two main reasons, but first, let’s wheel back to why lenders charge interest in the first place.

Interest, as a concept, is as old as borrowing is. When lending first started informally centuries ago, the borrower might give their lender a little bit extra as a “thank you”, and to make up for the inconvenience being temporarily out of pocket might have caused. It’s a little bit like the idea where a friend of yours helps you with something, and you buy them a drink or dinner as a thank you for their help. As lending became formalised, the idea of a small fee that thanks the lender for helping stuck around, so when you pay interest, this is partly why. The other reason lenders charge interest is because the money they earn that way helps them to cover their losses if some customers don’t repay what they’ve borrowed. The more likely a lender thinks someone is not to repay their borrowing, the higher the interest rate they will usually charge.

With a secured loan, the interest rate is lower, first and foremost, because of the risk factor around putting your home up as security on your borrowing. For lenders, the risk in lending to you when you’re using your home as security is relatively low, because it gives them another option – repossessing your home – to recover their losses if it turns out you’re not able to repay them. For you as a borrower, you’re risking losing your home if you can’t repay, so chances are you’d only miss payments on a secured loan if you had no other choice. On the whole, lenders consider it pretty unlikely that they wouldn’t get the money they’ve lent to you back, one way or another.

The other reason the interest rates on secured loans are relatively low is because normally, secured loans come with long repayment terms, sometimes up to 25 years. Over the years, even a relatively low interest rate can add up to a lot of money in pounds and pence, so remember to bear this in mind when comparing loans – a lower rate over a longer term can still mean more to repay overall!

How many secured loans can you have at once?

How many secured loans you can have depends largely on how much equity you have in your property. Equity is the portion of your home you own outright, that isn’t already linked to a mortgage or other secured loans. As long as you have equity remaining, in theory, you could continue to get more secured loans.

However, there is, of course, more to it than that. When you secure a loan to your property, this gives the lender a legal interest in your home and a claim to any proceeds as and when you sell it, if you still owe them money at the time. Every time you apply for a new secured loan, your mortgage provider and any other secured lenders you’ve borrowed from will usually need to agree to another loan being secured on your property. If they refused to give their permission, then the new loan would likely not be able to go ahead.

If your mortgage provider and secured loan lenders do need to make a claim on the proceeds from the sale of your home, then the order they can make their claims in is the same order you borrowed from them. Your mortgage provider – if you still have a mortgage – will take first dibs, and then each of your other secured lenders can make their claims. This means that the more secured loans you have, the more expensive you may find they become in terms of interest, because the lender is further down the pecking order and less likely to be able to recoup their money when it comes to claims.

And, of course, you only get the proceeds left over from selling your home after your mortgage provider and other secured lenders have all taken their claims. If the entire value of your property is required to repay mortgages and secured loans, then you will get nothing from the sale. This is worth bearing in mind if you already have a mortgage and a secured loan, and are thinking about another.

Will a secured loan help build your credit history?

Secured loans, like most other types of borrowing, will be included in your credit report. So, while getting the loan could cause your credit score to drop at first because of the hard credit check that comes with taking out credit, making the payments on time can help your score to recover, and can help you build your credit history by showing that you’re someone who keeps up with their financial commitments.

If you ever make a payment late, miss payments, or need to come to an arrangement with your lender where you pay less than you originally agreed to, though, then these things could harm your credit history. So, as with other types of credit, for a secured loan to help build your credit history and improve your credit score, you’ll need to keep up with the payments.

What can secured loans be used for?

In theory, you could use a secured loan for almost any purpose. But, the fact that you could lose your home if you don’t or can’t repay a secured loan should make you think carefully about what you use it for. Many people who take out secured loans are planning to undertake a project that would add value to their home, like a loft conversion, extension, or extensive renovations. Others borrow to consolidate their other debts to simplify their monthly payments and save money on the interest they’re paying. Some people even take secured loans to help their families have the best start in life, too, by using the money to help with university costs or even a deposit for their own homes. Generally, it’s not recommended to use a secured loan to pay for luxuries like a holiday or a sports car, but ultimately, what you use a loan for is your choice.

Can you get a secured loan if you already have a mortgage?

Yes. It’s quite normal to already have a mortgage when looking for a secured loan. The secured loan will be a “second charge” mortgage, while your original mortgage stays the “first charge”. This talk of charges refers to the order in which lenders can lay claim to the proceeds from selling your house – either when you choose to sell it yourself, or it’s sold following repossession.

Although already having a mortgage won’t usually get in the way of you being approved for a secured loan, it’s worth remembering that your mortgage provider will be notified when you apply for a secured loan and will be asked to agree to another company having a legal interest in your property. This means that – although this is rare – they could say no. So, if you’re worried this might happen, it could be worth asking your secured loan advisor to set your mind at ease.

How do you work out your equity for a secured loan?

To work out the equity you have in your home – and therefore how much you can borrow as a secured loan – you’ll need to know the current value of your home, and how much you still owe on any mortgages or other secured loans you have. The difference between what your home is worth and how much you have left to pay on your mortgage is your equity.

If you’re not sure what your home’s value is, you can get a free estimate from Zoopla to help guide you. But, your secured loan lender or adviser will likely confirm this during the application process to make sure you have the equity you need for your loan.

Can you get a secured loan without proof of income?

In the past, some secured loan lenders would allow you to self-certify your income by signing a declaration that states your income is what you say it is. But, this is no longer allowed. Secured loan lenders are required to obtain evidence of what your income is. Many do this by asking for proof of your income in the form of a payslip or, if you’re self-employed, records of your accounts that have been verified by your accountant. If you don’t have these means of proving your income, for example because you’re newly self-employed and don’t have years and years of books yet, then it’s best to speak to your prospective lender about what they could accept as an alternative.

How is a secured loan different to equity release?

Equity release schemes and secured loans are quite different things, despite both involving the equity you have in your home.

Equity release schemes are usually only available to people who own their home and are over the age of 55, although some schemes require you to be 60 or even 65. They’re designed to give you access to some or all of the money that’s tied up in your home, either as a cash lump sum, annual payments, or a combination of the two, and you’ll usually only repay the interest – not the full loan. Some equity release schemes may even allow you to “roll up” the interest, so you pay nothing during your lifetime. Equity release schemes generally last either until you die or move into long-term care. At this point your home will be sold, and the equity release provider will take a share of the proceeds in line with the amount of money you have received from them.

Secured loans, on the other hand, are a bit different. Like equity release, what you can borrow depends on the amount of equity you have in your home. But, the equity isn’t released, as such. With a secured loan, you are expected to repay to the loan as you go along, rather than it being repaid upon your death through the sale of your property. If you were to die while repaying your secured loan, then the loan would either be repaid from your estate, or, if you applied jointly with another person who survives you, it would become their responsibility to repay.

Are secured loans a good idea?

At the end of the day, only you can decide if a secured loan is a good idea for you or not. Secured loans do, without a doubt, represent a risk to you as a borrower, as your home can be repossessed if you don’t repay the loan. But, if you know for certain that there’s no chance of this happening, and you will always be able to afford the repayments on any loan you take, then a secured loan can be a more cost-effective way to borrow large sums of money than other types of loan. It’s always a good idea to explore all your borrowing options to find a solution that both solves your needs and is as cost-effective as possible before making a choice.

This article is designed to answer common questions about secured loans and provide general information. The contents of this article does not constitute financial advice. If you are interested in a secured loan then we recommend doing further research and speaking to a qualified financial adviser for specific advice on your circumstances.

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