what is a secured loan?

if you have assets you can use to borrow money from a bank, you can borrow a secured loan. it might sound riskier to give up an asset or promise it if you can’t make your payments, but it allows higher loan amounts and more attractive terms.

when you put up collateral, the lender has something to fall back on if you don’t make your payments. the collateral banks see most often are cars, houses, business assets, and land. you’ll know the type of collateral required by the name of the loan, for example:

  • mortgage collateral = house
  • home equity line of credit collateral = house
  • car loan collateral = car
  • land loan collateral = land
  • business loan collateral = inventory or other business assets

how much will a secured loan cost me?

secured loans have better terms than unsecured loans because of the collateral attached to them. however, this doesn’t mean lenders don’t charge fees to borrow the funds.

all borrowers will pay interest or a fee the lender charges to lend them the money. you pay interest on a loan as long as the balance is outstanding. the interest charges slowly decrease each month as you pay the loan balance down, but your payment never changes. however, your payment will slowly change from mostly interest and a little principal to most principal and a little interest as you near the end of the term.

some lenders also charge an origination fee. this is an upfront fee to borrow the funds. you don’t have to pay the funds out of your pocket. the lender keeps the funds from your loan amount. for example, if you borrow £20,000 and the lender charges a 1% origination fee, they’d keep £2,000 from your loan amount. therefore, your payout would be £18,000.

what do I have to consider with a secured loan?

like any loan, you should carefully consider your financial situation before borrowing a secured loan. because you’re putting your collateral at risk, you must ensure you can afford the loan.

if you miss three or more payments, you could lose the asset you put up for the loan, such as your house, car, or business. not to mention, defaulting on a loan can be detrimental to your credit.

always pay attention to the cost of the loan too. because it’s secured, you should get a lower interest rate and/or fees, but never assume. always read the fine print and know the loan’s total cost.

ask the lender the following:

  • is there a prepayment penalty if i pay the loan off early?
  • how much is the origination fee (if any)?
  • what is my interest rate?
  • how long is my term?

know all the details about the loan before taking it. once you sign the loan and receive the funds, you can’t change your mind, so make sure you understand it first.

what is the difference between a secured loan and an unsecured loan?

when you need money, you have two options: a secured or unsecured loan.

as we already discussed, the secured loan uses collateral but may give you better rates and terms on the loan. an unsecured loan may be an option too, but it’s riskier for lenders, so it is harder to get.

lenders don’t have any collateral with an unsecured loan. so if you don’t make your payments, they don’t have an asset to sell to make their money back. this may sound ideal, but it can cost you more money.

lenders typically charge higher interest rates and fees on unsecured loans to compensate for the risk of default.

unsecured loans are usually for lower loan amounts because there isn’t any collateral backing it up. lenders usually limit the loan amounts to £10,000 - £25,000. in addition, they require borrowers to have great credit scores and low debt-to-income ratios to ensure they can afford the loan.

what requirements do i have to meet to get a secured loan?

to get a secured loan, you must prove the collateral's value and ability to repay the loan. in addition, lenders will require proof of the following:

  • good credit – your credit report must signify that you pay your bills on time and use your money responsibly. in addition, it should show that you don’t overextend yourself and use your credit lines responsibly. most lenders prefer borrowers to have good a credit score.
  • stable employment – lenders like to see a 2-year stable employment history with stable or increasing income. of course, this is always important, but lenders pay more attention if you’re buying a house or car since you’ll need to borrow a large amount of money.
  • low debt-to-income ratio – lenders must ensure you aren’t already overextended with too many debts taking up your monthly income. the ideal debt-to-income ratio with any new loans included is 36%, but some lenders will allow a dti of up to 50%.
  • valuable collateral – to get a secured loan, you need an asset for the lender to put a lien on in case you don’t pay your loan. a house, car, or land are the most common forms of collateral. to ensure they are worth enough, the lender will require an official valuation or appraisal of the asset.

how much secured loan can i get?

because secured loans have collateral, you can borrow much more than you could with an unsecured loan. the amount you can borrow depends on the asset’s value and the required down payment.

for example, if you’re buying a house for £200,000 and the lender requires a 10% down payment, you can borrow £190,000 if your debt-to-income ratio allows.

which secured loan is the cheapest?

to get the cheapest secured loan, shop around. if you apply for the same type of loan within a few weeks of one another, it won’t hurt your credit. in other words, the credit bureaus will only hit you with one inquiry versus one for each loan.

when you compare loans, look at the interest rate, closing fees, and the bottom line. then, ask the lender how much the loan will cost over the entire term. legally, they are obligated to share this information with you.

this number can help you find the right loan. for example, you might find that a loan with a low-interest rate costs more over the loan’s term because of the fees the lender charges. don’t assume one is better than the other; compare actual numbers.

what tips are there to make the secured loan more favourable?

to get the best rates and terms on a secured loan, try the following:

  • improve your credit score – show lenders you have great credit and financial responsibility. the higher your credit score is the better rates and terms you’ll get. you may also be eligible for higher loan amounts with higher credit scores.
  • keep your income stable – lenders don’t like to lend money to borrowers who aren’t reliable. if you change jobs often, it shows that you aren’t stable. instead, keep the same job and show stability to increase your chances of approval.
  • keep your debt-to-income ratio low – if you’re buying a house or car, you need to borrow a lot of money, so your other debts should be minimal. try to have a debt-to-income ratio of 36% or lower for the best rates and terms.
  • make sure the collateral is valuable – to borrow the most money and get approved, the collateral should be in good condition and worth enough to cover the debt. lenders will typically order an appraisal to ensure the collateral’s worth.

how quickly can i get the secured loan paid out?

secured loans can take longer to pay out than unsecured loans because there is a lengthier underwriting process. in addition, unsecured loans don’t have collateral to evaluate, and the loan amounts are much lower than secured loans, so they pay out faster.

the reason you need the funds determines how long it will take. for example, mortgage funds to buy a house can take 30 – 45 days to receive, but funds to buy a car may only take a day or two.

when can i repay or reschedule or increase the secured loan?

all secured loans have a strict repayment process. you’ll pay principal and interest each month on the loan. how much of each you pay and whether your payment changes depends on the type of interest rate. for example, the interest rate and loan payment never change if you have a fixed interest rate.

however, you can also get an adjustable rate loan, which means the rate adjusts annually based on the market and the lender’s chosen index. in this case, your payment amount might change annually.

as with any loan, if you’re having trouble making payments, reach out to your lender. they may be able to modify the terms or defer your loan temporarily until you get back on your feet. however, don’t ignore your payments because if you miss three or more payments, the lender can repossess the asset and sell it.

unlike unsecured loans, you may be able to increase your loan amount with certain secured loans, specifically mortgage loans. if you owe less than the home’s value, you may be able to increase your loan amount by refinancing the loan, taking out a larger amount, and receiving the difference in cash.