When you’re shopping around for a loan, choosing a secured loan can be a great choice. In the UK, loans secured on property are the most significant form of household debt and in 2022 alone, the number of approvals for loans secured on homes (including remortgaging) has reached almost 65,000 , according to the Bank Of England. And in the years between 2012 and 2020, the amount repaid each quarter on secured loans by homeowners has regularly exceeded a staggering £13 billion .
Offering a number of attractive advantages over unsecured loan options, a secured loan can work out cheaper for you in the long run, too. Yet being accepted for such a loan is not guaranteed, even when you are putting up capital or assets (such as your home) as security. Read on to discover the ways in which you can improve your application and give yourself the best possible chance of success.
A secured loan is a loan which is given against a form of financial guarantee in the form of an asset, such as a house. For this reason, they are also commonly known as homeowner loans, home loans, or second-charge mortgages. As the loan amount is secured on the property, this means that if you do not keep up with the loan repayments as agreed, then the lender will be able to repossess and sell your home in order to recoup their funds.
When you take out a secured loan, you will have monthly repayments to make, which will include interest on the borrowed sum. The rate of interest will be calculated according to the total amount of money that is still owed, with the option to choose between fixed and variable rates.
A secured loan differs from an unsecured, or personal, loan, in that you are putting up a tangible asset for the lenders to regain their money in the event that you are no longer able to make the agreed repayments. With an unsecured loan, no such capital is put forward, which means that this kind of loan is calculated as a higher risk to lenders. In return, this makes unsecured loans more difficult to obtain, and you will typically require a very good credit score in order to be approved. Having a good credit score shows lenders that you have a proven track record for reliably meeting your financial payment commitments, but, even with an excellent credit rating to your name, it is very unlikely you will be able to get a personal loan for sums over £25,000.
In choosing a secured loan, you can access greater sums of money, often up to £100,000 or more. This means that an unsecured loan can be used to add value to your home, by financing an extension or other improvements, or it can be used to pay for education and training that could significantly boost your earning potential. Recent studies have shown that in 2021, 3 in 5 of those who take out a secured loan did so in order to consolidate other debts, and/or to fund home improvements .
A secured loan will usually have a longer repayment period than personal loans, too. Unsecured personal loans are typically repaid over a maximum period of 7 years, whereas with a secured loan, you can extend your repayments over a much longer term, with the average loan duration in 2021 being 13 years . In practical terms, this means that the amount to be repaid each month will be considerably lower, making it a more affordable option. Of course, a longer repayment period will mean that you will end up paying more interest over the total loan period.
Furthermore, by securing your loan against an asset such as your home, you don’t need such a high credit rating when you apply for a secured loan. This is because your financial history is less critical for insurers when making their loan decision, as they know that they can recoup their money by taking possession of your assets, making you a lower risk proposition.
When you decide that you’d like to take out a secured loan, you can help your chances of being accepted by carefully assessing your financial situation before you begin. The first step should be to determine just how much collateral is associated with your property. Get a professional valuation carried out by an independent valuer or an online service such as Zoopla. Although they may seem like the obvious choice for the task, avoid using an estate agent, as lenders are typically sceptical that such professionals may have inflated the property’s value due to their business model.
Next, look at how much you still have to pay off on your mortgage, which can be simply done by contacting your mortgage provider. This amount, along with any other credit that may be secured on your home, should be subtracted from the sum given during the valuation. The remaining sum will indicate how much equity you have to offer with your home, and gives you a sound basis for your secured loan application.
For example, if you have a property valued at £300,000 and you have £100,000 left to pay on your mortgage and £20,000 secured against it already, than your home’s equity will be £300,000 minus £120,000, or £180,000. Therefore, in this example, the maximum secured loan amount available would be around £180,000. Knowing the realistic equity available to you before you start your secured loan application will not only save you time and energy, but will also help to reduce the chance of being denied a loan that is for too high a sum.
Of course, you shouldn’t apply for a secured loan that matches the equity available in your home if you don’t need to. The next step in preparing your secured loan application should be to assess carefully what amount you actually need to borrow. If you are planning home improvements, take the time to get a few quotes from local tradespeople, and use this as a useful gauge, whilst factoring in a financial buffer to accommodate any unexpected delays or expenses caused by unforeseen complications.
Remember too that the more you borrow, the greater the amount of interest you will need to repay. Lenders will run an “affordability test” as part of their decision making process, and they will need to feel confident that you will be able to commit to making your loan repayments over the long term, without it putting you under financial strain. Whilst opting for a shorter repayment term may indeed reduce the total amount of interest you’ll pay, it will in turn bump up your monthly repayment amount.
If lenders feel that you are over-extending your finances with high repayments, then you could well find that your loan application is turned down. Being realistic about what you can afford to repay each month is therefore essential, even if this means that you find you need to apply for a longer repayment term. As your home will used as a guarantee for the loan, being sure that you can comfortably afford the repayments is the most important factor, as you will risk the loss of your home should your repayments fall behind.
A credit check will always form a key factor in your lender’s loan decision, regardless as to whether you opt for a secured or personal loan. Even if a secured loan is advertised as a “guaranteed acceptance” loan, it will be subject to applicants having a good credit rating, with a proven history of responsible borrowing. It therefore makes sense to take steps to develop the best possible credit rating before you come to apply for your secured loan.
You can find out the current status of your credit rating quickly and easily online, and there are a number of apps available that will let you track it. This will also allow you to check for and correct any errors which may be negatively impacting your credit rating. You can also try using an online eligibility checker, which can offer a useful insight into your chances of being accepted for a secured loan with a reputable lender, and doing this won’t affect your credit rating.
To improve your credit rating, you can start by making sure that you are registered on the electoral roll. This simple action is free of charge, and provides proof of address. If you have any unused credit accounts, close them down. When it comes to existing accounts such as credit cards, your credit rating will benefit if you make sure you repay the balance in full each month. Don’t max out those credit cards, either: lenders will look at your “credit utilisation”, which is the proportion of your maximum credit limit that you use. For example, if your credit limit is £1800, be careful not to exceed 30% of this amount.
It pays to take the time to look at your credit score, as applicants with a high rating will not only be more likely to be accepted for a secured loan, but will also be offered higher sums of money along with the most attractive interest rates.
In addition to your credit score, a lender will take a closer look at your financial history before making their decision. This will likely include a look at your whole credit report for the preceding six year period, with an interest in seeing your regular payments made (and of course, any missed or late payments), and your available credit. Your available credit refers to your current capacity to borrow money, and includes things like credit cards and any overdraft facilities. As we mentioned above, keeping to 30% or less of this amount will help to demonstrate that you are not financially over-committed, and are therefore in a good place to take on a secured loan and its associated repayments.
It’s also worth knowing that lenders will also look at your internet hard search history, to see specifically whether you have been making a lot of applications for credit. However, lenders will usually recognise that wise customers will shop around and compare loans before making their choice of product, so doing your due diligence research into the best secured loan options for you shouldn’t cause any problems for your ultimate application.
The good news is that once you’re ready to make your secured loan application, you should soon be making use of the funds if you’re successful. In April 2021, the average time to completion on secured loan paperwork was less than a fortnight . Follow our advice, and you could soon be benefiting from your own successful secured loan application.
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