Who can apply for a secured loan?
To apply for a secured loan you will need to own something that can be used as collateral against the value of the loan.
Usually this means a property of some kind, but in rare cases some lenders will consider offering secured loans against other items.
Like with an unsecured loan you'll also have to be able to show the lender that you can afford to repay the loan.
Why is collateral important?
Collateral provides the lender with extra security should something go wrong further down the line and you're unable to repay your borrowing.
When you put up your property as collateral on a loan the lender has a claim to part of the value until the loan is repaid - this way if you default they have the right to sell your property and reclaim their funds.
Providing collateral for a loan can also have advantages for you the borrower as it usually means you're viewed as less of a risk by lenders and can therefore find cheaper loans or if you need to, borrow larger amounts.
Are secured loans right for you?
If you are given the choice between two identical loans and the only difference was that one was a secured loan and the other an unsecured loan, you should opt for the unsecured loan every time.
This is because a secured loan will have a specific claim to repossess your property (or other any other item being used as collateral) while with an unsecured loan your belongings will be at less risk. Should you want to re-mortgage or move home at a later date having a secured loan outstanding could also limit your options.
This means that there has to be distinct advantages to choosing a secured loan over one that's unsecured.
In some cases, secured loans will be a viable option, for instance:
You need a large loan
The most you can borrow using an unsecured loan is £25,000, although loans of that amount are only available to those who meet stringent affordability checks and have an impeccable credit history.
Things are slightly different where secured loans are concerned, lenders will offer much larger loans because they have the fall back option of selling your property should they need to.
The exact amount you'll be able to borrow will depend on the value of the property you're using as collateral, the equity you have in it, your income and the amount you can reasonably afford to repay If you tick all the boxes though some companies offer loans of up to £500,000!
You need to spread the cost
Unsecured personal loans are normally intended to last somewhere between 1-5 years. Some providers stretch to 7 and sometimes 10 year terms for home improvement loans but in most cases unsecured loans are meant for mid-term borrowing.
If you are looking to spread the cost of your borrowing over a longer period a secured loan could be an option.
Given the extra cost to the lender of ensuring your property is suitable to act as collateral they are often willing to offer loans over a longer time period.
However, just because this is an option doesn't mean that you should take them up on the offer. Remember taking longer to repay your loan will ultimately make it significantly more expensive because you'll be paying interest for longer.
You don't have any other affordable alternative
If you have a chequered financial history a secured loan could be a more affordable and available option than unsecured bad credit loans.
This is simply because the lenders have the added back up of having your property listed as collateral against the loan and are therefor willing to lend to those with bad credit without charging really high interest rates to compensate for the risk.
That said, you should consider the added risk that you could potentially lose your home if you're unable to repay.
What are the risks of a secured loan?
If you take out a secured loan and don't pay up on time you could lose your property. So the worst case scenario is that you end up homeless because you don't keep up with your repayments.
Things would have to go really and irreversably wrong for this to happen but you still need to be aware that it's a risk, exactly as it is when you take out a mortgage.
Although it is expensive for loan providers to re-possess your property and reclaim the balance of your loan, when you take out a secured loan you will have written into the contract a claim on the property meaning there will be little you can do to stop them.
Equally if you take out a secured loan and then want to move house, sell up or buy another property things may be more complicated as a result.
Read our guide: Should you borrow against your home for a closer look at the implications of securing borrowing against your property.
Finding the best secured loan
If you've decided that a secured loan is the best option for your circumstances you're ready to begin looking for the best deal possible.
Getting the cheapest loan possible is likely to be your main objective, but it's also worth weighing up other factors before you make a final decision.
The loan term, whether you have the flexibility to repay early, application restrictions and the amount you can borrow are all important features you'll need to check.