What is a secured loan and how does it work?

A secured loan is a type of loan, which allows you to borrow large sums over longer periods, with less reliance on factors like your credit score.

When you take out a secured loan, also known as a homeowner loan, you tie the debt to an asset—like your home—as collateral in case of failed repayments. This provides the lender with additional security, making them more comfortable to lend higher amounts or allow a longer repayment term.

Of course, this does mean that your home is at risk of repossession in order to pay back the money you owe, if you fail to make these repayments. So it’s absolutely crucial to stay on top of repayments with a secured loan.

While this might sound intimidating at first, secured loans are a lot more common than you might think—a mortgage, for example, is a special type of secured loan used by millions of homeowners across the country.

With a secured loan you can borrow anything from £10,000 all the way up to £2,000,000, over a term of 1 to 30 years.

Once you have found a lender, applied for a loan, and received an offer, the process to receive the money can take a little longer than an unsecured loan, due to the additional paperwork required. For example, you’ll need to provide the documents relating to your home, and the lender will need to validate these.

Once the paperwork is done and you have received the money, you will be required to repay the loan over the agreed schedule. It is crucial to make these repayments on time every month, to avoid complications that could result in your home being repossessed.

Once all of the debt has been repaid, along with any additional charges or interest, the loan agreement will come to an end.

While a secured loan uses your home as collateral for the debt, an unsecured loan does not. As the name suggests, the loan isn’t secured against anything—meaning the lender has no guarantee they’ll see the debt and interest repaid.

As a result of this, there are a number of differences between the two loan types:

• Borrowing amount—with the additional security of a secured loan, lenders will be more comfortable lending larger amounts. Through our lenders, for example, you can apply to borrow anything from £5,000 up to £2,000,000 with a secured loan. For more information about your options for various loan amounts, you can check our series of borrowing amount guides.
• Loan term—with an unsecured loan, lenders will often want to see the debt repaid sooner. If you want to borrow over a longer period, say 10 years, you’ll likely need to go with a secured loan. To learn more about loan terms, check our series of loan term guides.
• Credit score—with an unsecured loan, lenders rely on factors like your credit score much more when evaluating whether you are eligible to borrow. So if you have a low credit score, a secured loan may increase your chances of being able to borrow.
• Defaulting on the loan—make no mistake, failing to make the agreed repayments on a loan is never good. But the impact of this will differ between secured and unsecured loans. With an unsecured loan, you will likely accrue additional charges and interest on the debt, as well as potentially severe impacts to your credit score. With a secured loan, on the other hand, in addition to all of these things, your home may be repossessed if you do not keep up with repayments.

As with all forms of borrowing, secured loans come with their own array of benefits and things to keep in mind. The significance of each of these may depend on your individual circumstances, so it’s important to understand the impact of both the pros and cons, before you apply for a loan.

Advantages of a secured loan

• Potential to borrow larger amounts than with a personal loan
• Repayments can be spread over a longer term, making them cheaper month-on-month
• You can borrow against the equity in your home without having to remortgage—this can save money on early repayment charges if you’re in the middle of a fixed-rate term
• You can get advice from a qualified adviser to find the right option for you
• You could improve your credit score if you make your repayments on time each month
• You may be offered a better secured loan than personal loan, particularly if you have a lower credit score, but a good amount of equity in your home

Disadvantages of a secured loan

• If the loan is secured against your home, the lender could repossess your home as a last resort to recover their funds—this is the same with any type of asset a loan is secured against
• Your credit score could be negatively impacted by missed or late repayments
• By taking advantage of longer loan terms, you may pay back more interest overall

Homeowner loans

If you own property, you may be eligible for a homeowner loan. This means borrowing money against your property in particular, rather than any other form of asset. Interest rates are typically lower than they would be for an equivalent unsecured loan The amount you are able to borrow will first depend on a valuation of your property and how much equity you own in it, amongst other things.

The borrowed amount will then need to be repaid in monthly instalments over your agreed loan term—usually this varies between 1 and 35 years. Interest is paid alongside your repayments.

Always consider the risk that your property could be repossessed if you miss repayments. Ensure you can afford the loan before you apply.

Mortgages

Mortgages are a form of secured loan used exclusively for purchasing a property. A mortgage differs from a traditional secured loan in that it’s the “first charge” against the property. This means that the lender has the first claim to recover their costs, whereas a secured loan is “second charge”, meaning the lender has the second claim to recover their costs. They are usually taken out with a bank or building society for a long loan term of up to 25 years.

Lenders may allow you to pay off your secured loan early—but you might encounter early repayment charges. Often referred to as a prepayment penalty, this fee can be seen as a means of protection for the lender.

It’s important to keep in mind the potential impact, if you are unable to make the agreed repayments on a secured loan:

• Credit score—missed repayments will appear on your credit report, impacting your credit score.
• Fees and charges—lenders may apply additional fees for missed repayments, depending on the terms of your loan agreement.
• Your home—most importantly of all, the debt is tied to your property. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.

If you are having trouble repaying a secured loan, it’s important to contact your lender immediately and they will be able to support you in finding a resolution.

Yes, it is possible to be eligible for a secured loan with a history of bad credit. However, if your credit score is very poor and the lender feels that the loan may put you in financial difficulty, you won’t be offered a secured loan.

When you apply, a qualified adviser will also take a look at your finances to make sure a loan is affordable for you.

Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.

Secured loans can be a great borrowing option, but they’re not for everyone. Depending on your financial situation, and how much you are looking to borrow, there are a couple of alternative loan options to consider.

• Credit card. If you’re only looking to borrow a small amount to tide you over until your next paycheck, a credit card can be a great option. It can also help to boost your credit score if you borrow often and keep up with your repayments.
• Unsecured loan. If you’re not a homeowner, don’t own enough equity, or are looking to borrow a smaller amount, you may still be able to get an unsecured or personal loan. Interest rates are likely to be higher because of the risk involved for the lender. If you have a strong credit score, you will benefit by being offered lower rates.