A guide to secured personal loans
What you need to know
- Secured personal loans allow borrowers to secure a valuable asset or property against a loan, usually for sums over £25,000.
- Secured personal loans usually come with lower interest rates, due to the extra-security of your property. Rates can be variable or flexible.
- If not agreed otherwise, you can use this money for any investment; often secured personal loans are used to cover larger purchases or house improvements to increase the value of the own property.
- Borrowers repay their loan in fixed monthly installments; depending on your agreement over a term between 10 and 25 years.
- If you fail to repay your loan, the lender can acquire and resell your property in order to redeem the borrowed amount.
- In this case, a distinction is made between first and second charge lenders and lenders will be repaid in this order. If after this distribution any money is left after the property-sale, this will be repaid to the borrower.
- Avoiding loan scams before making your decision is crucial, thus always take some time to shop around for good and also reliable and trustworthy offers.
What are secured personal loans?
If you intend to borrow money from a bank or building society, there are usually a broad range of options that you can choose from, depending on your requirements and financial situation. One of those options are so called secured personal loans, which allow you to borrow amounts over £25,000. This type of loan is often used for larger purchases or house improvements but also to consolidate other debts and allows borrowing up to £100,000. The name already suggests that such types of loans are secured against a personal property. This can be a house, vehicle or other type of high-value asset, which is why secured loans are also often referred to as homeowner loans or second mortgages.
Secured personal loans thus mean that your loan is backed by the equity you have in a property, and this type of loan is characterised by a high degree of security for money lenders. The term equity describes the amount between the property-value and the remaining mortgage that you still need to pay. If a borrower fails to repay the debt, lenders are authorised to repossess the secured asset, resell it and thus use the money to cover the unresolved debt.
There are two main reasons why personal secured loans have become popular in recent years. First of all, the security of putting an own asset against the loan allows the borrower to receive a more favorable interest rate in comparison to unsecured loans, where the lender is missing this additional security and thus can charge higher interest. Secondly, secured loans make it easier to borrow a larger amount of money at a time, again due to the extra security of a resalable asset.
While these are two advantages of secured personal loans, using personal property as a security against a loan can turn out problematic for the borrower. While at the first instant when an installment is not covered, the borrower usually only receives a warning from the bank or building society, repeated failure to re-pay the own debt can lead to the loss of the own home or whichever other asset is used, as this property will be acquired by the lender if the terms and conditions of repayment are not met.
Secondly, there may be certain restrictions on early repayment of the loan regulated in the loan agreement. Hence it may not always possible to cover the loan in full before the official end of an agreed term, even if the borrower may request this, as banks earn with every monthly installment through the interest rate and thus make a loss in the case of early repayment.
How secured personal loans work
When applying for a secured personal loan, your personal and financial circumstances will be taken into account. Borrowers with a less than perfect credit rating tend to benefit from the offer of personal secured loans, as they are more likely to qualify for and receive a secured loan. A credit check is usually part of the application process for a personal secured loan and your credit history, personal circumstances and the value of your property are taken into account to determine the term of repayment as well as the interest rate. Usually the amount that is borrowed as well as the value of your property determines the length and amount of your secured loan agreement.
In order to understand the practicalities of personal secured loans, it is worthwhile to take a closer look at the definition of so called first and second charges. If you are still re-paying your mortgage for a property, this is considered the first charge, while the property which is secured against the loan is held on a second charge basis.
The administration of first and second charge loans is regulated by the Financial Conduct Authority (FCA). Based on this ranking, the first charge lender gets repaid before the second charge lender. This means in practice that if the borrower fails to repay the loan, a repossession of the secured property may take place to repay the borrowers. Thus if the property is sold as a consequence, the first charge lender gets paid before the second charge lender.
Interest rates and repayments
Due to the security of your personal property, interest rates for secured loans tend to be lower than for personal unsecured loans. Generally a distinction is made between fixed and variable interest rates, while variable interest rates are more common for this type of loan. In this case, your rates may fluctuate and repayment rates can increase or decrease, making it difficult to set up a budget plan. Even though they are closely tied to the economic climate or lender criteria, thus fairly unpredictable, variable interest rates tend to be lower than fixed ones.
While other loan-types may prescribe a purpose for which the money should be used, secured loans are fairly flexible in this regard and usually leave the free choice to the borrower, unless agreed otherwise. Like with any other type of loan, the borrower and lender arrange for a fixed term during which the money has to be repaid and agree upon a payment schedule. Usually repayment happens in regular monthly installments over a ten to twenty-five year period. Such fixed monthly installments allow to make a financial plan and to keep an overview of long-term expenditures that are part of the loan-agreement.
The loan-agreement usually also entails a number of additional regulations, such as for instance arrangements for early repayment. It is thus worthwhile to study and compare such offers in regard to hidden charges or early repayment penalties.
How to select a secured personal loan
As with other financial deals and offers, shop around for the best rates and always evaluate your own situation thoroughly. Below are just some of the main things you should take into account when choosing a loan, though do consider seeking expert advice before you make a big financial commitment.
- Think about the amount of money you want to borrow as well as your long-term ability to repay weekly or monthly installments. Consider important factors such as variable or fixed interest rates and the duration of your overall agreement. When you compare different types of secured loans, take a look at the Total Amount Repayable and the Annual Percentage Rate. While the Annual Percentage Rate describes the finance charge for money loans as an annual rate, which might fluctuate every once in a while, your Total Amount Repayable is the overall amount you need to have covered at the end of the repayment term. In order to make sure to have a full grasp of all your financial obligations, set up a finance plan where you calculate your regular repayments and potential additional charges before you choose the personal secured loan that you find most suitable.
- When taking out a secured personal loan and making a final decision, bear in mind that you profit the most from a flexible loan that allows you to make amendments to the agreement as you go. This can be beneficial if you suddenly want to repay your loan at once before the end of the agreed term or if you want to lower or increase your monthly installments. Otherwise you might end up with a loan-agreement that does not adapt to your requirements and financial circumstances in the long run.
- Also bear in mind that if you should choose at a later point to lower your monthly installments, this may have a significant impact on the overall sum you are paying back, as you will end up paying interest in smaller installments but over a longer term, an additional sum which you may not have taken into account in your initial calculation.
- A possible alternative to a secured loan can be an increase of a mortgage on a property. Depending on your financial circumstances this option might be easier and less risky than taking on a completely new loan and securing it against a valuable asset.
It goes without saying that securing a loan against your home or another valuable asset is a very big step to take. This is why you need to know what you're doing, which means getting as much advice as possible.
- The Money Advice Service offers impartial advice on a range of financial matters. Their guide to secured and unsecured borrowing can help you decide what type of loan is best for you and help you make the right decision.
- The government's Gov.uk website is also a great place to find objective advice. Read their guide to the options for paying off your debts before you make any big decision.