We explain all you need to know about taking out a secured loan.
A lender who offers secured loans requires the borrower to provide some sort of guarantee for the loan.
In most cases this guarantee is made on the borrower's property which can be repossessed if regular repayments are not met: therefore it is usually only homeowners who are eligible to apply for secured personal loans.
First charge loans
Loans taken out against a property that is owned outright are called first charges and tend to be the cheapest secured loans. First charges are more attractive to loan providers as they have direct access to a property’s equity to recover their investment.
Second charge loans
Loans taken out against a property with an outstanding amount left on the mortgage are known as second charges.
With second charge loans the mortgage company have first claim on any equity released and only then will the loan company be able to recover funds they are owed, if loan repayments aren’t met.
Because of this you might have to pay higher interest rates on a second charge loan as the insurer tries to protect its investment.
How much can you get?
The amount available on a secured loan tends to be larger than that offered through an unsecured channel; this is because the lender has a guarantee that one way or another they will be able to reclaim their funds.
Loan amounts may be anything up to 125% of the value of the secured property. The most common amounts tend to be between £3,000 and £100,000, although a higher sum may be possible.
Some loan providers offer their best secured loans targeted at different levels of borrowing, so the cheapest secured loans for you will vary depending on the amount you want to borrow.
What are the interest rates on secured loans?
The interest rate applied to a secured loan is dependent on the amount borrowed, the value of the property against which the loan is secured and the personal circumstances and credit history of the borrower.
Although secured loans for bad credit are likely to have higher interest rates, secured loan companies (especially those who specialise in bad credit loans) are still willing to lend to individuals who fall into this category.
This also applies to others who may find it difficult to obtain unsecured credit including the self employed and those who work on a contract basis.
Before committing to a secured loan it is important to compare the secured loan rates advertised by lenders so that you can get the cheapest secured loans.
It is important to bear in mind that the typical APR advertised may not be the rate applied to your loan. However it does give you some indication of the spread of interest rates they offer and so the amount you may be eligible for.
Most secured loan companies offer the option of payment protection to be taken with the loan. This insurance is designed to cover the loan repayments for a certain period of time if you are unable to work due to accident, sickness or unemployment.
Although this comes at an added expense, it can be worthwhile especially if you do not have any other means of paying the monthly amounts: your home is likely to be at risk if you don't meet the repayments.
However you need to consider whether you need this very carefully, particularly due to past Payment Protection Insurance (PPI) mis-selling. Take a look at our guide, Do You Really Need Payment Protection Insurance? to find out more.
The majority of secured loan companies do not place restrictions on what the borrowed funds can be used for (providing it is for legal purposes), so whether you want to consolidate your existing commitments or refurbish your home, a secured loan can be a good option.
However, before committing to a secured loan make sure the monthly payments offered are manageable within your income budget.
If you compare administration fees and interest rates offered, you can be confident of choosing the cheap secured loans that match your needs.