What should you look at when comparing loans?

What is a secured loan?

Secured loans are also known as home-owner loans, or second-charge mortgages. They allow you to borrow money from a bank or loan provider using your home as security (or collateral). This means that if you do not keep up with repayments, the loan provider may sell your house to recover their money. There are a huge variety of lenders providing secured loans and it can be difficult to know which one is best for you. When making the decision, however, there are a number of different factors to consider.

Types of secured loans

There are three main types of secured loan available:

• Fixed for term: This means that your repayments will be at a fixed rate throughout the entirety of your loan period and will not go up or down depending on interest rates. This can be useful to help you budget your monthly costs as you will know exactly how much is going out, but can mean that your repayment rate is higher overall.
• Short term fixed rate: This type of loan is similar to the above, but the fixed payment amount lasts for a shorter period, usually between one and five years. Following this period, your payments will be determined by the lender’s specific interest rate, which could mean that your payments go up or down. This can help you budget for the immediate future but it’s worth considering how future payments may be affected by changes in interest rates, as well as any changes to your income.
• Variable rate: A variable rate loan means that the interest charged on your monthly repayments will be determined by the current Bank of England base rate. This goes up and down depending on various factors including inflation. This can mean there are significant differences in your monthly repayments, which can make it harder to plan your finances.

Advantages of secured loans

• Unlike an unsecured loan (where a provider has lent you money without any collateral), secured loans are understood to be less risky for providers as they know they will be able to recover their money if you default on payments. This means that they are usually able to offer a lower interest rate so you pay back less money overall.
• As unsecured loans are less risky for providers, they are helpful for those who may find it difficult to get an unsecured loan. For example, those with a poor credit rating (or no credit rating) or people who are self-employed may not be able to borrow as much or with such favourable terms as they are deemed at higher risk of not being able to pay the money back. Those with CCJs may also be able to apply for a secured loan.
• You will generally be able to borrow more money with a secured loan than other types of loan. Whereas unsecured loans are generally for amounts below £10,000, you may be able to borrow up to £250,000 with a secured loan. Usually the minimum amount you can borrow for a secured loan is £5,000 so it’s important to accurately estimate how much money you will need for your project to determine if a secured loan is the most appropriate lending option.
• The amount of time over which you are expected to repay a secured loan is also usually longer than those for an unsecured loan. Most terms are for between five and twenty-five years. That means that monthly repayments could be lower as you will be paying them off over a longer period of time. However, it’s important to remember that this means you may be paying off more interest overall.
• Secured loans can be very useful for raising money which may be required for a range of reasons. The most common use of a secured loan is to pay for home improvements or renovations, but they can also be used to help with the cost of education or training, or to consolidate other debts into one fixed monthly payment.

Disadvantages of secured loans

• Failing to keep up with repayments could mean your home is repossessed. This means that secured loans can be potentially risky and it’s important to make sure that you’re confident you will be able to make your payments regularly.
• There may be fees attached if you wish to pay back your loan faster. This is called an early repayment charge and is generally an amount between one to three month’s interest, although rates could be notably higher. The amount varies according to each provider (more on this below). You will also be expected to pay back your loan if you move home during the repayment period which could be a large cost to factor into your other moving expenses.

How much can you borrow?

The amount you are able to borrow for a secured loan depends on three main considerations:

1. The value of your home: The amount you wish to borrow must be less than the value of your house.

2. Your equity: When you apply for a secured loan, lenders will look at how much of your home you own outright compared to its value, that is how much of your mortgage you’ve paid off (the amount of the property you own is known as equity). This means you can borrow more if you own a larger proportion of your house and have a smaller mortgage. This is termed the loan to value ratio and tells the lender how much money they can expect to recoup from selling your house if you fail to keep up with payments.

3. Your financial history and credit rating: If you’ve had a loan previously and failed to make payments, this can impact how much a provider will lend you as you will be deemed a higher risk of paying back your loan. Your credit rating can also impact the amount you can borrow.

It’s wise to borrow the lowest sum of money possible for your needs. If you are borrowing money to complete home renovations then you should accurately estimate how much the planned work will cost, remembering to factor in labour costs, materials, and any planning permission or architect’s fees. If you are seeking a secured loan to consolidate debts, the first step is to work out how much your debts are by listing them separately, along with their associated interest rates. This will help you work out how much you need to borrow.

What should you look at when comparing loans?

When comparing loans, it is very important to consider at least the following factors:

The interest rate and APRC: The interest rate of your loan is a percentage of the total amount you’ll be borrowing and can vary significantly, depending on the provider and your credit score. Those with a better credit score can expect lower rates of interest, but those with a poor credit score can expect to pay significantly more. The APRC (Annual Percentage Rate of Charge) of a loan will also help you to understand the total cost repayable on the amount you wish to borrow. The APRC rate of a loan includes both the interest rate and the compulsory charges payable with it, such as the arrangement fee. The lower the APRC rate of a loan the better, however it’s important to remember that APRC rates advertised may only be representative and can differ to the final rate offered to you.

As above, it’s also important to remember that secured loans may have variable interest rates which may change during your term. It’s important to establish interest rates before you apply for a loan to make sure you able to afford your repayments. Interest rates in the UK have recently risen which will have a marked impact on the amount of interest you will pay. Financial forecasting suggests that interest rates may rise as high as 1.25% in 2022, but could go even higher by the end of the year [1].

It’s important to remember that a rise in interest rates may also impact on your other costs. If your main mortgage is on a tracker or variable rate, it’s likely that these payments will go up, reducing the amount of money you may have left over to make repayments on your secured loan. Cost of living increases in fuel, food, and energy, may also mean you are able to afford less. Fuel prices for example rose 12.6p per litre in the UK between February and March 2022 [2].

• Fees: Some secured loans have set up fees and costs attached to them which you’ll need to figure into your calculations to compare loan payments. Compulsory fees will be covered by the loan’s APRC rate information but there may also be penalties for late payments or administration charges (and some of these may not be obvious).
• Your credit score: Your credit score will also influence how much lenders will be able to give you. Prior to applying for a loan it can be a good idea to check your credit score and take some time to work on it if it is not very good. Having a better credit score gives you more choice over the loans you can apply for, which means you can pick more favourable interest rates and terms.
• The repayment terms of the loan: As above, there may be a fee if you pay back the entirety of your loan before the loan period has completed. It’s important to consider this before making the decision to pay back the loan in full; it may be better to set the money aside to continue making scheduled payments.
• The duration of the loan: Secured loans usually have a longer term than other types of loans. This means you’ll have longer to pay off your debt, reducing the amount per month you’ll need to pay back, but increasing the overall amount of interest you’ll pay. It’s generally best to try and have the shortest loan term possible as this means you’ll be paying back less interest overall. However, it’s important to make sure that this will not stretch you financially. Remember that your financial situation could change over the term of your loan (for better or worse!).
• The affordability of your payments: When researching loan rates, you must make sure that you will be able to afford your repayments, even if something unexpected happens (such as the car breaking down or the dog needing an operation). Make a list of your expenses and work out how much income you can comfortably put aside to make repayments, remembering to account for rises in expenses as well as any money going into savings.

Finding the right secured loan

It’s important to shop around and compare loans to make sure you’re getting the best rate and loan features to suit your individual needs. Use Free Price Compare’s loan comparison tool to search for the best secured loan for your situation, out of over 100 available options, with decisions and information available in just a few minutes. This is done by completing a soft credit search to give providers an accurate understanding of your credit history. This is important as soft credit checks do not impact on your credit score. Some comparison sites complete full credit checks which can have a negative impact on your credit score as it will appear that you have made applications for multiple loans, affecting how much you will ultimately be able to borrow.

Making repayments

It’s very important that repayments are made on time every month and in full. Not making payments could mean that you lose possession of your home. Failing to make payments can also have a negative impact on your credit score which will affect your ability to apply for credit cards or any other type of loan.

If you’re struggling to make your repayments, you must inform your loan provider as soon as possible. They may be able to support you with an alternative payment schedule or offer advice. The Citizens Advice Bureau can also offer support if you are struggling to manage your finances. Their debt telephone helpline is available 9am-5pm Monday to Friday on 0800 240 4420 [3]. Free debt management advice can also be found on the Money Helper website with links to online and telephone debt advisors available [4].