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Simon Nicholson

Written by Simon Nicholson on October 4, 2019

Updated October 18, 2019

What is a secured loan?

When it comes to finding a loan, there are a lot of aspects to consider. It is never a decision that should be taken lightly, and there a few things you must know before you can choose the right loan for you. One of the most vital decisions to make is whether you want a secured or unsecured loan and what that means for your finances and assets.

Many individuals do not fully understand what a secured loan is, how they work, or the risks involved. This guide covers everything you need to know about secured loans, including some tips and advice from our financial experts.

What Is A Secured Loan?

A secured loan is asset-backed, and this means that you must offer some form of security to the loan lender. This security is usually a property or vehicle, and whilst that asset will still be yours to own and use, the lender could repossess it if repayments are not made.

If you fail to keep up the payments on a secured loan, then the lender has the right to sell your assets in order to get their money back. Once the loan has been fully repaid to the lender, plus interest, then the asset used for security will no longer be at risk of repossession.

The amount that can be borrowed with a secured loan will often be determined by the value of the asset being used as security. The asset must always be valuable enough to cover the loan amount plus interest, should the repayments not be kept up. For the majority of lenders, if you want to borrow a large amount of money, then a secured loan is the only option.

The length of a secured loan and interest rates charged will be dependent on your unique financial circumstances, including your credit score. You could still be rejected for a secured loan if your credit score is poor, even if you have an asset to use as security.

What Type Of Assets Can Be Used For Secured Loans?

The majority of secured loans that are taken out are secured against a property. They are also known as homeowner loans but are not to be confused with mortgages which are also secured against a home. If you already have a mortgage on a property, then you may also be able to get a secured loan using the same property. The secured loan would be against the equity of the property that you own.

It is also possible to take out a secured loan using a vehicle as security, and this is often known as a logbook loan. If you choose to use a car or other vehicle as security, then you will be required to give the lender your logbook or vehicle registration document until the loan has been fully paid off. The value of these kinds of secured loans will depend on the value of the vehicle itself.

Whatever assets you choose to use for a secured loan will be put at risk of being repossessed if you are unable to make the repayments. Think carefully about the risks involved and whether you can realistically afford to repay the loan on time.

Why Choose A Secured Loan?

There are many reasons why individuals choose a secured loan over an unsecured option, and they come with many advantages. Some of the most significant benefits of secured loans include:

  • Lenders will usually be willing to loan a higher amount of money as a secured loan compared to unsecured, giving you the option to borrow more should you need to.
  • Secured loans are often longer-term than other types of personal loans, giving you more time to pay off the balance.
  • Monthly payments are often cheaper than other loan options. This is because the loans are often longer-term meaning there is more time to spread out the payments. This secured loan calculator will give you an estimate of the monthly repayments.
  • Interest rates on secured loans are often better than with unsecured loans or other types of borrowing such as credit cards. This is because they are less of a risk to the lender as they have the security of your assets if payments are not made.
  • A secured loan can often be taken out on a property even if you already have a mortgage. This allows you to keep your existing mortgage and is often cheaper than remortgaging, which can include high additional charges.
  • Monthly payments are often fixed for the entire duration of a secured loan, making it easy to plan your finances and know you can afford the repayments.
  • Many borrowers are more likely to be accepted for a secured loan than other forms of lending. This is because secured loans are less risky to the lender, and many individuals with low credit scores can be accepted for a secured loan.
  • Those with poor credit can use a secured loan to help build up a good credit score. See the bad credit secured loan guide for more information.

Secured loans can be spent on anything you please, and most lenders do not restrict what the money can be spent on. Many individuals choose secured loans for home improvements or debt consolidation because of the larger amounts of money available.

What Are The Risks Of Secured Loans?

Whilst secured loans come with a range of benefits; there are also some risks that borrowers should be aware of. The biggest danger is that you could end up losing any assets you use as security. If repayments are not made on time and you default on the loan, the lender has the right to repossess any collateral used. It is vital that you carefully consider your budget and are confident you can repay the loan.

Not only are your assets at risk if you do not make the loan repayments, but it will also negatively impact your credit score. This can make it very difficult to be accepted for any other form of borrowing in the future. Before taking out a secured loan, make sure you are in a financial position to make the repayments.

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Think carefully before securing other debts against your home.
Your home may be repossessed if you do not keep up repayments on a loan or any other debt secured on it.

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