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.
There are three main types of secured loan available:
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.
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 .
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 .
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.
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 . Free debt management advice can also be found on the Money Helper website with links to online and telephone debt advisors available .
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