How much does a secured loan cost?

Almost 10 million people in Britain had a loan in 2020 [1] and a significant number of these are secured loans. But what is a secured loan and how much is one of these likely to cost you? The answer to the final question will vary but there are some general factors to think about when considering this type of loan. Read on to find out more.

Secured loans explained

A comprehensive secured loan definition is a loan that is secured against your assets or a single asset, such as your home. These are a popular choice as they can result in lower interest rates, longer repayment periods, and greater borrowing power, but there are risks involved if you don’t make your repayments. You must always remember that you could lose your assets if you fail to repay this type of loan in full.

Whilst all secured loans are secured on assets, they can be known by different names. Terms used include homeowner or home equity loans, second charge mortgages or second mortgages, first charge mortgages, and debt consolidation loans.

How much can you borrow?

Secured loans are typically used to borrow more than £10,000 but a range of factors will dictate how much is available to you. These include the value of your asset, your equity (the amount you actually own and not the amount covered by a mortgage), your financial history, and your personal circumstances.

It is important to only borrow what you actually need. It can be tempting to borrow more if you are offered it, but this can be a costly mistake. Not only will you have more debt than you need, but you will also end up paying more interest and pay have to choose a longer repayment period in order to afford the amount that it will cost. Secured loans can be invaluable but they should always be used responsibly due to the risks that are inherent in this kind of loan.

The cost of a secured loan

One of the major reasons many people opt for secured loans is the lower interest rates that they can provide. Accompanied by longer repayment periods, this can make a large loan seem more affordable. This is especially true if you do your research, compare options effectively, and make sure you get the right product for you. It is worth remembering, however, that if you make use of a longer repayment period, you will end up paying more interest, which can mean you are paying more in the long run.

It is also important to check out the small print when it comes to costs as some secured loans can have hefty arrangement fees, along with other charges. Any set-up costs and charges should be included to make up the APRC (annual percentage rate of charge) which applies to a loan. This is similar to an APR figure used for unsecured loans and both of these figures are invaluable when it comes to comparing loans.

Changing costs

It is worth remembering that the cost of your secured loan can change over time, depending on the type of product that you choose. There are 3 main kinds of secured loan.

Fixed for term

This is the best option for you if you don’t want the cost of your secured loan to change. You will know from the outset how much your repayments will be each month and this will stay the same throughout the whole term. This can make it far easier to budget.

Short-term fixed rate

You will pay a fixed rate for a short term of normally between a year and five years and then your repayments will be affected by the standard variable rate of your lender. This means that your payments may go down or up.

Variable rate

This type of loan means that your interest rate will change if the base rate from the Bank of England alters. This can result in you paying more or less in both the short and the longer term. At the time of writing, the base rate was 1 per cent [2] but this is subject to change at any time. Bank rate history and data can be found on the Bank of England website [3].

Comparing secured loans

Comparing secured loans is a great way of ensuring that you get the right product for you and don’t pay more than you have to in getting the money you want or need. Look at the cost of borrowing and also compare terms and conditions.

You should also be wary of what sites you use to compare secured loans as some comparisons can show on your credit report. This can make it appear as though you have applied for a loan when you haven’t and this can have an adverse effect on your credit rating. Fortunately, you can use Free Price Compare services safe in the knowledge that no credit check will be carried out as a result of your engagement with our site until you have spoken to an advisor about an application and have made the decision to move forward.

What is secured loan collateral?

Collateral is the term used for an asset that you can use to help you to qualify for a particular loan. The aim is to make your lender feel more confident about lending you money as your asset offers them protection for their financial risk if you failed to repay your loan in full.

If you default on your loan, your lender could seize your collateral as a means of compensating for the financial loss. This means that your assets are at risk if you fail to make the repayments on your secured loan.

What can be used as secured loan collateral?

The most common form of collateral for secured loans is property and the third quarter of 2021, for example, saw more than £13 billion being repaid on secured loans related to dwellings [4]. Property is far from the only form of collateral, however, and secured loans can be backed by all sorts of things with monetary value. Collateral can include anything from a car to cash held in savings accounts. Other options include stocks, boats, insurance policy, bonds, fine art, jewellery, antiques, precious metals, and collectables.

Loans secured against other assets

As we mentioned previously, secured loans are available using assets such as cars and boats as collateral, but it is important to ensure that this is the right choice for you and that you are getting the loan from an appropriate source. Pawnbrokers, for example, can offer you a secured loan with antiques, jewellery and other assets used as collateral, but this may not be the most cost-effective option. They may be able to offer a fast loan but you are likely to pay very much more in interest than you would by obtaining a loan from a bank or other reputable financial institution.

What difference does collateral make when it comes to taking out a loan?

Collateral offers added security for lenders and so they can typically offer you larger amounts than with unsecured loans, together with the potential of longer terms and lower APRs (annual percentage rates). It can also make it possible for you to get a loan if you have a lower credit score and might otherwise be refused the opportunity to borrow. In the longer term, making successful repayments on a secured loan can help you to repair or improve your credit score.

Secured loan credit builder

You can use a secured loan to build credit, either because you have had financial difficulties in the past or because you are just starting to establish a credit history. They can be easier to get because of the decreased risk for the lender, meaning that you don’t get stuck in a vicious circle where you can’t get a loan because you don’t have the right credit history and you can’t build or rebuild your score because you can’t get a loan.

Another option is a credit builder loan, which can help to demonstrate your worthiness to potential lenders. Credit repair or credit building loans can allow you to make repayments and pay off a loan in full to demonstrate your ability to repay another loan in the future.

Secured loan consolidation

There are many reasons why you might be considering taking out a secured loan and using our services to compare products and find the right option for you. It may be that you have plans to renovate your home or need to cope with a family emergency. Another common reason for people to compare secured loans and borrow money in this way is debt consolidation. You may choose to take out a second charge or first charge mortgage to merge all of your debts, for example.

What to do if you default on a secured loan?

The Money Helper website, formerly known as the Money Advice Service, provides lots of information about managing your finances and borrowing money. There is a whole section devoted to money troubles and dealing with debt [5].

One of the most important things to do if you find yourself having problems with debt is to not bury your head in the sand. Free debt advice is available and there are schemes such as Breathing Space [6], which is designed to offer some protection from creditors while you sort your financial situation out.

Understanding a lien against collateral

A lien is essentially the name given to the lender’s right to keep hold of your collateral if you do not repay your loan in full. You can continue to make use of your collateral while you make your loan repayments and the lien is removed once your secured loan is repaid.

The effects of defaulting on a loan

It is important to feel confident about your ability to make the required repayments on a secured loan before borrowing. As we mentioned previously, defaulting can result in losing your possessions but that is not all. It can also have severe consequences when it comes to your credit score and your ability to borrow in the future. Your credit report will contain details of a defaulted loan for six years. All this time, it will have a negative effect on your credit score.

The impact does lessen over time but can still lead to severe borrowing restrictions and the need to pay a higher rate of interest than you might otherwise. Don’t worry if you do have a defaulted loan on your credit report, however, as there are still options out there. We can help you compare options if you have a previous default affecting your credit score.