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Secured and unsecured borrowing explained

A secured loan is money you borrow secured against an asset you own, usually your home. Interest rates on secured loans tend to be lower than what you would be charged on unsecured loans, but they can be a much riskier option. If you fall behind with payments, your asset might be repossessed, so it’s important to understand how secured loans work and what could happen if you can’t keep up with your payments.

Secured loans explained

Secured loans can be useful if you need to borrow a large sum of money, typically more than £10,000. 

The term ‘secured’ refers to the fact a lender will need something as security in case you can’t pay the loan back. This will usually be your home.

Some loans might be secured on something other than your home - for example, they might be secured against your car, jewellery or other assets.

Secured loans are less risky for lenders because they can recover the asset if you default, which is why interest rates tend to be lower than those charged for unsecured loans.

But they are much riskier for you because the lender can repossess the secured asset – for example, your home – if you don’t keep up repayments.

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Pros and cons of secured loans

Pros
    • You can usually borrow a bigger sum of money than you would be able to with an unsecured loan.
    • You’ll normally pay a lower interest rate than with an unsecured loan.
    • It might be easier to be accepted for a secured loan than an unsecured loan if, for example, you don’t have a good credit history or you’re self-employed.
Cons
    • The loan is secured on your home or other asset, which you migh lose if you can’t keep up your repayments.
    • Secured loans are often repaid over much longer periods than unsecured loans. So, although your monthly repayments might be lower, you might be paying it off for up to 25 years. This means you’ll pay more overall in interest.
    • Some loans have variable interest rates, meaning your repayments could increase. Make sure you know whether the rate is fixed or variable.
    • Some secured loans have expensive arrangement fees and other charges. Make sure you factor this in when you work out how much the loan is going to cost you. Arrangement fees and other set-up costs should be included in the Annual Percentage Rate of Charge (or APRC - this is similar to the APR for unsecured loans). Use the APRC or APR to compare products.

Types of secured loans

There are several names for secured loans, including:

  • home equity or homeowner loans
  • second mortgages or second charge mortgages
  • first charge mortgages (if there is no existing mortgage)
  • debt consolidation loans (although not all of these loans are secured).

Home equity or homeowner loans — borrowing more from your mortgage lender

You may be able to get a further advance on your mortgage – you borrow an additional amount of money against your home from your current mortgage lender.

This might be a useful option if you’re looking to pay for some major home improvements or to raise a deposit to buy a second home.

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First and second charge mortgages

A first charge mortgage loan involves taking out a loan when you have no existing mortgage.

A second charge mortgage involves setting up a separate agreement from your existing mortgage, either with your existing mortgage lender or by taking out the loan with a different lender.

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Debt consolidation loans

If you owe money on a number of different products, you can merge them together into one debt consolidation loan. This might be secured or unsecured.

Debt consolidation loans secured on your home could be either first or second charge mortgages.

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How to get the best deal

If you’ve decided a secured loan is the best choice for you, then your first step might be to approach your mortgage lender to see what they offer. Some will offer special loan deals to those borrowers who have a good record repaying their mortgage.

Next, check some comparison websites to see if you can get a better deal with another lender. But remember comparison websites do not always offer a comprehensive selection of deals. As well as researching the cost of borrowing, be sure to compare the terms and conditions of each loan and what could happen if you’re unable to repay.

If you’re comparing lots of deals, for example, on a comparison site, check whether doing this will show up on your credit file. Some lenders will carry out a full credit check on you before providing a quote, so it can look like you’ve actually applied for the loan.

If this happens lots of times, it might harm your credit rating. Ask if they offer a ‘quotation search’ or ‘soft search credit check’ or eligibility checker instead, which doesn’t show up on your credit reference file – this can be useful when you are shopping around and not yet ready to apply.

Loans secured against your car or other assets

Loans secured against your car are known as logbook loans. Generally, they’re expensive, risky, and best avoided.

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Pawnbrokers offer loans secured against jewellery, antiques, or other assets. They can lend money quickly, but their interest rates are usually higher than high street banks (but lower than payday lenders).

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Unsecured loans explained

An unsecured loan – also called a personal loan – is more straightforward. You borrow money from a bank or other lender and agree to make regular payments until the loan is repaid in full, together with any interest owed.

Because unsecured loans aren’t secured on your home, interest rates tend to be higher.

If you’re late with a payment or miss one altogether, you might incur additional charges. This could also damage your credit rating.

The lender can go to court to try and get their money back.

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How to complain if things go wrong

If you’re unhappy, your first step should be to complain to the loan company.

If you don’t get a satisfactory response within eight weeks you can complain to the Financial Ombudsman Service.

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MoneyHelper is the new, easy way to get clear, free, impartial help for all your money and pension choices. Whatever your circumstances or plans, move forward with MoneyHelper.

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