Raising substantial sums quickly with secured loans

Secured loans can be a way of raising substantial amounts of money quickly but they depend on you being able to pledge assets as collateral. Let’s take a look at what they are in more detail and whether one could be the right choice for you.

What is a secured loan?

A secured loan uses an asset as collateral. This is usually your property and offers lenders more security. This means that they may be able to offer you a bigger loan and better interest rates. The biggest danger of this type of loan – which may also be called a security or homeowner loan – is that you could lose your property if you do not keep up with repayments. This is why the Bank of England recognises loans secured on dwellings as the most important form of borrowing for most households [1].

Types of secured loan

There are three main types of secured loan. These are . . .

Fixed for term – This is where you will pay fixed repayments throughout the loan term.

Short-term fixed rate – These are similar to fixed rate mortgages where you pay a fixed amount for a set period, which is often between 12 months and 5 years, and then your repayments will be determined by the standard variable rate of your lender.

Variable rate – Your interest rate will change according to the Bank of England base rate. This will make it important to keep an eye on interest rate news, such as when bank rate went up to 0.75 per cent in March 2022 [2].

Should you consider a secured loan?

Secured loans do carry a major risk if you fail to make your payments but, for many people, they do offer a viable and affordable way to raise large amounts of money quickly. Whether they are a good choice for you will depend on a range of factors and your own personal circumstances.

Benefits of a secured loan

There are several major reasons to consider a secured loan. These are . . .

More borrowing power

Secured loans can be the answer when you need a larger amount of money than you are likely to get with a standard loan. This type of loan is often used to fund home renovations, for example.

Lower interest

Secured loans will usually offer you lower interest rates and so could save you money in the long term, provided that you are confident that you will be able to pay back the loan.

Easier to get

Lenders are more likely to loan you money if they have the security of a major asset, even if your credit score is less than perfect. The average credit score in Britain is currently just under 800 [3] and rose during the coronavirus pandemic, but there are still many people who are looking for loans with CCJs or a bad credit history behind them.

Longer repayment periods

You could choose to pay back a secured loan over a longer period in order to reduce your monthly outgoings.

How much can you borrow?

Most people will not be able to borrow more than around £20,000 without securing a loan. This is why secured loans can be the only way of raising large sums. The amount you can borrow will depend on the value of your asset – usually your home. This will have to be worth more than the amount that you want to borrow and the more it is worth, the more you may be able to borrow.

The equity will also play a major part. Lenders will loan you money according to how much of your property you actually own. This means that you may be offered a smaller loan if you have a bigger outstanding mortgage.

Your financial history will also be considered. Lenders will be less inclined to offer you higher sums if you have a history of defaulting on a loan and are considered to be a higher risk borrower.

It is also worth remembering that you don’t have to borrow the maximum amount possible. Really consider how much you actually need to borrow and be wary of stretching your finances too tightly. It is vital that you can be confident that you can make the repayments you need to for the whole duration of your loan.

The application process

Lenders will have their own application processes but there are things that you should do before you even make a credit enquiry. These include:

Checking your credit score

Make sure you check your credit score before making an application. This will ensure that you spot any mistakes before you apply and can have issues rectified if you need to. Your credit score may also influence where you look for your loan as you may need to consider specialist lenders if you have a poor credit history.

Compare loans

Use Free Price Compare to compare loans that may be available to you. This is a simple process if you are looking to borrow between £5,000 and £250,000 with a secured loan. We can show you products with fixed and low interest rates and compare more than 100 secured loans to help you to find the product that you need. We can help you make an informed choice about the right loan for you and many lenders offer a decision in minutes. Don’t worry if you have defaults, arrears, or CCJs, either, as we also find products for people with poor credit histories.

Check your equity

The amount of equity in your home is vitally important and so you must make sure you know what this is. To do this you will need to get an accurate valuation. You could do this through an online service or by employing the services of an independent valuer. Just be aware that some lenders will be cautious if you are offering an estate agent valuation. This is because these can be overvalued according to the agent’s own agenda.

Once you have an up-to-date value, you will have to find out how much you have left to pay on your mortgage and any other debts that you have secured on the property. Then, simply subtract the amount owed from the value of your property and you have the equity.

Things to consider

When thinking about a secured loan, there are a number of factors that you should consider in order to ensure that you get the right product for you. These include:

The APR

The APR represents the overall cost of your borrowing and so it is important to compare products to make sure that you do not pay more than you have to over the term of your loan. The APR figure will include any compulsory charges and interest but will not factor in extra charges and fees, such as if you don’t make repayments on time.

The LTV (loan to value)

When comparing secured loans, the LTV is an important figure that lenders use to determine lending risk. It is essentially the amount you are borrowing against the value of your asset. This means that the higher the LTV ratio, the higher risk your loan will be considered to be. Typically, the best interest rates are offered for LVTs of 80 per cent or less.

Terms and conditions

Make sure you read the small print and check out the terms and conditions of the loan you are considering. Look at things such as early repayment charges which could add a considerable sum to your loan if you want to pay it off before your official borrowing period ends. This is because the lender may want to recoup some of the interest that they will lose out on if you pay early. As many as 90 per cent of people accept legal terms and conditions without reading them [4] but this is not the time to take risks, especially as your home can be put in jeopardy if things go wrong.

How long will it take to get a secured loan?

As we mentioned previously, a secured loan can be a reasonably fast way of getting your hands on a large amount of money. Don’t expect it to happen overnight, however. Secured loans will typically take longer to arrange than smaller unsecured loans because of the paperwork involved. The exact amount of time will depend on the specific lender and factors such as how quickly you send off the paperwork required and whether you apply online (which is usually quicker).

In general, it is likely to take three to four weeks but you may have to factor in things such as a property valuation if your lender demands this before they will come up with an agreement and transfer the funds. You should attempt to send off any paperwork requested as soon as possible but don’t rush things and make mistakes as this can often lead to the process taking even longer.

What documents will you need?

This will again depend on the lender’s requirements but typically you will be asked to fill out an application form and provide proof of your income and outgoings, such as bank statements, payslips, or pension awards letters. In general, you will be asked to supply evidence in support of the information that you have provided to the lender in your application to ensure that it is accurate. This will include proof of your identity and address.

What if you change your mind?

You get a 7-day window, known as the ‘reflection’ period, when you can change your mind about wanting the loan without having to pay any charges. This period starts from when you are made a firm offer.

What if you plan to move house?

If you plan to move house, you may have to pay off your secured loan before this can happen. Some lenders will transfer a secured loan, however, and use the equity in your new property as collateral. If this is likely to be an issue, you should ensure you know what your lender’s policies are. You could also look at other options when moving home, such as personal loans or bridging loans.

Getting an offer

There are two types of secured loan offer. A Conditional Mortgage Offer, or CMO, is made first and is followed by a Binding Mortgage Offer (BMO). The CMO offers an illustrative quote but there will be conditions to be met before your application can move forward. This is when you will provide the required documents and, if everything is in order, your lender will issue a BMO. Once this happens, you have the reflection period to consider the loan terms and the lender is not allowed to contact you over these 7 days. You don’t have to progress with the loan if the BMO is not satisfactory. You will accept the loan when you sign and return what is known as the Legal Charge, Standard Security or Mortgage Deed.

References

• [1] bankofengland.co.uk
• [2]bankofengland.co.uk
• [3]thisismoney.co.uk
• [4]lawyer-monthly.com