How does a secured loan work?
How does a secured loan work?
If you’re looking to borrow money, you may be facing a decision between secured and unsecured lending. Understanding the ins and outs of each is crucial to ensure you’re making the right choice for you and your finances.
Whether you’re considering your options or looking for more information before applying, here’s our guide to secured loans. Read on for insight into what they are, how they work, their pros and cons and more.
What is a secured loan?
A secured loan is a borrowing agreement between you and a lender guaranteed by one of your assets. When a property is used as the ‘security’, they’re commonly referred to as 2nd charge mortgages or homeowner loans.
Secured loans are just one of the options available if you’re looking to borrow money from a lender. However, it’s important to understand how these work and what you’re agreeing to before applying.
How do secured loans work?
The fundamentals of a secured loan are the same as an unsecured (personal) one: you borrow money and pay it back in instalments over the loan term, plus any interest owed. Some loans are offered with a fixed interest rate, while others come with a variable interest rate which can rise and fall.
Where secured loans work slightly differently is the need for ‘security’. To receive the loan, you put up an asset as a guarantee – this is usually a property if you’re a homeowner. You must be a homeowner with an existing mortgage to be eligible for a 2nd charge mortgage/secured loan.
If you fail to keep up with repayments, the lender can legally take possession of your home to repay the money you owe them – although this is a worst-case scenario. However, if you make all your repayments in full and on time, there’s no need to worry about that. Once the loan is paid back in full, the lender no longer has an interest in the property.
What are the pros and cons of secured loans?
The advantages of a secured loan agreement may make it an attractive option for you but it’s equally as important to think about the potential disadvantages. Consider the following before applying for one.
Secured loan pros
- You could borrow more: With the security of a property guaranteeing your loan, lenders are often more willing to lend larger amounts than with unsecured loans. You could borrow anything up to £100,000 and perhaps more with some lenders. However, this amount usually depends on factors such as your mortgage balance, the value of your property and the amount of any lending secured against it.
- You could find it easier to be approved: Secured loans carry reduced risks for lenders, so you may find it easier to be approved if you’ve already been rejected for a personal loan. This can be true even if you have a poor credit history. You may also be able to add your partner to the agreement, which can further improve your affordability.
- You could spread repayments over a longer period: Most personal loans have to be repaid within seven years but secured loans usually come with the option of extended loan terms. Spreading repayments over a longer period can help to reduce your monthly instalments if that’s a priority for you.
Secured loan cons
- Your property could be at risk: It’s crucial to understand that, if you fail to make repayments, your lender is legally able to repossess your home to repay the money you owe them. If you do fall behind on repayments, you should reach out to your lender for support. There may be other ways to resolve the issue but think carefully about this risk before applying.
- You could pay more interest overall with a longer loan term: Reducing your monthly repayments may be a priority for you but keep in mind that this is likely to cost you more in interest over the loan term. However, this may still be worthwhile depending on your circumstances.
- You could face fees if you choose to repay early: Paying off a secured loan sooner than you thought can be a great feeling but beware that you may be subject to early repayment fees. You may still be able to save money by repaying early but it’s worth comparing the charges before doing so.
What can secured loans be used for?
Secured loans can be used for a variety of reasons, including:
Can I get a secured loan with bad credit?
One of the main advantages of secured loans is that you’re more likely to be approved even if you have a bad or non-existent credit history. This is because the asset you offer as security, most commonly your home or another property you own, guarantees the loan and reduces the risk for lenders compared to unsecured personal loans.
Can I get a joint secured loan with my partner?
If you own your home with a partner, a secured loan tied to your property would have to be a joint loan. You may be able to access more borrowing options and better rates with two incomes rather than one. It’s crucial to understand that you’re both legally responsible for making repayments, even if the relationship ends. Find out more in our guide to joint loans.
What documents do I need for a secured loan?
The basic documents usually needed for a secured loan application are:
- Proof of identification
- Proof of income
- Bank statements
- Proof of
- You may be asked for other documents by the lender during the application process.
How long does a secured loan application take?
The process of applying for and obtaining a secured loan could be more extensive than for a personal loan. It could be a matter of weeks until you receive the money from when you first start your online application.
During this time, the lender will run checks to ensure all the information provided is accurate, assess whether you can afford the repayments and file all the necessary paperwork.
Check your eligibility for a secured loan from Evolution Money
Ready to apply? Check your eligibility for a secured loan with Evolution Money today. We may be able to lend you up to £100,000, with flexible repayment terms from 3 to 20 years.
Feel free to read some of our customer reviews to see why we’re rated ‘Excellent’ on feefo. All our services are regulated by the Financial Conduct Authority and we’re proud members of the Finance and Leasing Association so you can apply with confidence.
For a typical loan of £30,000.00 over 120 months with a variable interest rate of 19.56% per annum, your monthly repayments would be £598.34.
Including a Product Fee of £2,400.00 (8% of the loan amount) and a Lending Fee of £807.00, the total amount repayable is £71,800.20.
Annual Interest Rates ranging from 11.88% to 29.38% (variable). Maximum 50.00% APRC. The loan must be paid back by your 70th birthday. Read more.
Think carefully before securing debts against your home may be repossessed if you do not keep up repayments on your mortgage or any other loan secured against it. If you are thinking of consolidating existing borrowing, you should be aware that you may be extending the terms of the debt and increasing the total amount you repay.
