Secured loans, also called home-owner loans, or second-charge mortgages, are loans which use your home as collateral (or security). In some cases, another high-value asset such as a vehicle may be used as collateral. Many people use secured loans to raise funds for renovations to their homes, or to pay for specific events such as weddings or holidays. They can also be used to consolidate other debts into one monthly payment.
As secured loans use your home or other asset as security, lenders are generally able to offer better rates of interest and longer repayment terms. That means that it can be a manageable way of borrowing a larger amount of money, however it’s important to remember that your home (or asset) may be at risk if you do not keep up with repayments. Secured loans can also be a good option for those with CCJs or poor credit ratings.
The process of getting a secured loan can seem daunting but we’ve broken down the fundamentals here to tell you everything you need to know.
How much can you borrow with a secured loan?
Secured loans are usually available for amounts above £5,000, and some lenders may be able to provide up to £250,000.
When applying for a secured loan it’s important to make sure that you only apply for the money you will realistically need. This will mean you are not paying unnecessary interest charges. If the loan is for a planned renovation or building work, you’ll need to have an idea of labour costs, building materials, planning permissions, architect’s fees, and any other expenses which may be involved. The Home Owner’s Alliance estimates that the average current cost of a renovation is between £26,000 and £34,000 . If the loan is to pay for a wedding or special event you’ll also have to consider all of the fees involved (from DJ hire to the cake!). Of course it’s important to balance this with making sure that you can afford your repayments and you should never borrow more than you can comfortably afford to pay back.
Working out your equity
In order to know how much money you can borrow, you’ll need to know how much equity you have in your house. The equity of your house is how much you own of it outright, that is, how much of the mortgage you have paid off versus the market value of the house. So, for example, if your house is worth £100,000 and you have paid off £25,000, that means you have £75,000 left on your mortgage and £25,000 equity in your property. This would give you a Loan to Value (LTV) ratio of 75% as this is the outstanding balance you owe. The LTV has a significant effect on the interest rate; the more equity you have in your home, the lower the risk to the lender and the better the rates are likely to be.
In order to work out the value of your home, you may need to complete a property valuation. The lender may also complete a property valuation when you make your application (more on this below) but you will need to have an idea of value to enable you to make your equity calculations. This is especially the case currently as house prices can vary significantly depending on the situation in your location. Nationally in the UK, the Office for National Statistics reported that average house prices went up 9.4% in the year up to December 2021 .
You can use online home valuation services such as Zoopla to give you an idea of the value of your house, or you could ask a local estate agent for a valuation. If using an estate agent, you may need to ask more than one to provide a valuation as estimates can vary. The lender you choose may also wish to complete their own valuation.
Do I need to own my house outright to apply?
Many people will not have paid off their mortgage entirely but this doesn’t matter when applying for a secured loan. You’ll be able to borrow money against the amount of your property that you own.
Once you know your equity, and loan to value ratio, it’s time to work out how much you can afford to repay each month. Lenders will evaluate this to make sure that you are able to afford repayments.
The first step in doing this is to look at your monthly income and household bills and see how much spare income you have left over. Interest rates in the UK have recently risen which will have a knock-on effect on the interest rate you will be paying on your secured loan. This may also impact the cost of your main mortgage, reducing your disposable income. The rise in interest rates, as well as other factors, has also meant that there have been increases in the prices of fuel, food, and energy, which may reduce the amount of money you can set aside to make repayments . Remember to also set aside some money for the unexpected such as the car breaking down!
Making repayments on time each month to repay your loan is vital. Failing to keep up with payments can put your home at risk as well as having a negative impact on your credit score.
You’ll also need to consider how long you want the loan to last. Secured loans are usually for a longer period than unsecured loans, and often have a minimum duration of five years. This is one of their benefits as it means that you will have longer to pay the loan off, giving you lower monthly repayments. However, this does mean that you may pay more interest overall. Most unsecured loans have a maximum term of twenty-five years and it’s important to make sure that you get a loan for the shortest amount of time possible to reduce the overall amount of interest you’ll be paying (whilst keeping your repayments affordable).
Checking your credit score and improving your credit rating
Before you apply for a secured loan, it’s a good idea to check your credit score. Having a good credit score means that you’re more likely to be accepted by more loan providers and given better repayment terms as you will be viewed as less of a risk. It’s important to check that there are no errors in your credit history as this can have an impact on your overall score. Check that details such as your address are correct, and make sure that there are no mistaken cases of late or missed payments. These can be resolved by contacting your bank or credit card provider. However, if there are genuine cases of missed payments (and these things happen) then it can sometimes be better to wait until these ‘black marks’ have been removed (the length of time this takes varies).
When checking your credit score it’s best to use a ‘soft search’ as this does not impact your credit rating.
How to get a secured loan with bad credit?
Don’t despair if your credit history is less than perfect, however, as you may still be able to get a secured loan. This is because your home is used as collateral so providers know they will be able to recoup any losses, therefore lending to those with a poor credit history is deemed less of a risk.
Comparing different secured loans
When you’ve established how much money you’d like to borrow and how long for, you’re ready to start comparing the best secured loan deals around. When comparing secured loans you’ll want to think about the following aspects:
The interest rate and APRC of the loan: the interest rate of the loan is a percentage of the total cost. The APRC (Annual Percentage Rate of Charge) of a loan is the amount the loan will charge in interest and compulsory fees. When looking at loans, the APRC rate you see may be representative and may not represent the actual final rate you’ll receive. This will also depend on the type of secured loan you wish to apply for: either a fixed interest rate, variable interest rate, or short term fixed rate. Interest rates during your loan could go up or down so it’s vital that your repayments won’t cause you financial difficulties.
Any fees payable: Some secured loans have initial set-up fees which you’ll also need to pay. There may also be other fees, such as penalties for any late or missed payments. There will also likely be an early repayment charge. This is a fee payable if you decide that you want to pay off the entirety of your loan before the term has finished. If this does happen, it’s worth calculating whether paying off the loan early is the best option or if it is better to set the money aside and maintain the scheduled repayments. You may also have to pay your loan back if you move home during the repayment period.
Making a secured loan application
When you are ready to make a secured loan application, the process is relatively straightforward.
What information will you need to provide?
Even though you will be using your home as collateral, lenders still have a responsibility to check that you will be able to afford monthly repayments. In order to do this they will require the following information:
Proof of identity including full name, date of birth, and address (for example passport or driver’s licence)
Proof of employment / self-employed accounts and information about monthly income (for example wage slips, bank statements, or accountant’s details)
Proof of address and ownership (utility bills, mortgage bills)
Details about the property being used for collateral including its value, address etc.
The process of applying for a secured loan
The process of applying for a secured loan can take longer than that for an unsecured loan as the lender will need to establish not only that you are able to afford repayments but that your home has sufficient value to cover the loan amount. Whereas an unsecured loan (also called a personal loan) can often be approved and funded within 24 hours, the process of applying for a secured loan can take several weeks.
The first stage in the process is fact finding. This is where a provider will establish that an applicant’s basic information is correct and that they are eligible to apply for a secured loan. They will be able to make you a speculative offer of a loan at this point but will then look for more information to determine the specific terms of the loan they are able to offer you.
To complete the second stage in the process, the loan provider will carry out a more detailed search about your credit history including whether you’ve had loans in the past and whether you have repaid them. This could include credit cards and bank overdrafts.
The lender may also complete land registry searches on your house to explore any issues or complications that may prevent the loan from being given. For example, if your house is at risk of losing value, the loan provider may not be able to recoup their full loan amount, meaning they will lend you less, or may not be able to provide the loan at all. This may also impact the interest rate offered.
The loan provider may also arrange a valuation of a property. This can sometimes be done automatically using information available digitally however, depending on factors such as the property’s age, location and history, this could be done by a surveyor. In order to do this, a surveyor would need to visit your house and complete an assessment of its condition, including the roof and outside areas. If this process is completed by a surveyor, it can prolong the process as it will take several days for them to complete a written report and submit it to the loan provider.
How long does it take to apply for a secured loan?
This will depend on the provider you’ve chosen and the information you need to give. Some lenders have fully online applications which are usually a lot quicker but you may still have to provide physical copies of evidence. If your home needs to be valued, this can mean the process takes a little longer. You can help to make the process go as smoothly as possible by providing any information and documentation promptly and making sure all of the details you provide are correct to the best of your knowledge.
Usually, the process for getting a secured loan takes around two to four weeks. You may be given documentation to sign saying that you agree to the terms of the loan. Once your loan has been approved, funds can be transferred to your account quite quickly, usually within hours or days.
Choosing the right secured loan for you
When you’re ready to look for your unsecured loan, you can use Free Price Compare’s loan comparison tool to search for the best one for your individual profile and needs. The tool uses your details to complete a soft credit search to let you know which loans you’ll be eligible to apply for.
If you are unable to keep up with repayments on your secured loan, it’s crucial that you contact your loan provider as soon as possible. If you’re struggling with debt, StepChange can provide free and impartial advice to support you. You can phone free on 0800 138 1111 or access online support 24 hours a day .