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What is a Secured Loan?

Find out what a secured loan, the benefits of a secured loan and things you should consider when applying for one.
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A secured loan is a type of loan that uses an asset as collateral. This means that if you are unable to pay back the loan, the lender can seize this asset until the debt has been repaid. Secured loans have several advantages over unsecured loans, with lower interest rates and longer repayment periods being chief among them.

Secured vs. unsecured loan: What's the difference?

The main difference between secured and unsecured loans is that secured loans are backed by collateral, while unsecured loans are not. Collateral is an asset that can be seized by the lender if you default on your loan. The most common type of collateral used for secured loans is a home or vehicle. So, when a loan is secured against something, that ‘something’ is an asset and the loan is a secured loan.

Unsecured loans, on the other hand, are not backed by any asset. This means that if you default on your loan, the lender cannot seize any of your property. That’s why unsecured loans typically have higher interest rates than secured loans, as they are considered to be a higher risk for lenders. Payday loans are unsecured, for example.

Depending on your credit, you may be able to qualify for either a secured or unsecured loan. However, if you have bad credit, you will likely only qualify for a secured loan. That’s because the lender sees a person with bad credit as more of a lending risk, so they reduce that risk by securing the loan against an asset.

Are there different types of secured loans?

Yes, there are different types of secured loans. The most common type of secured loan is a mortgage, which uses your home as collateral. If you default on your mortgage, the lender can foreclose on your home. First mortgages (where the loan is secured against the value of the property) and second mortgages (where the loan is secured against the home equity) are both kinds of secured loan. Homeowner loans and equity release loans are also types of secured loans that use your home as collateral.

You can choose for your debt consolidation loans to be a secured loan. With these loans, you can use your home or car as collateral as you consolidate all various debts into a single payment.

Besides mortgages, other kinds include secured personal loans, vehicle loans, and secured credit cards, which are typically backed by a cash deposit, rather than an asset.

Pros and cons of secured loans

An image of a piece of paper with the headings Pros and Cons.

Depending on your circumstances, either a secured or an unsecured loan may be right for you.

  • Secured loans generally offer better interest rates. That's because lenders can afford to be less stringent when offering secured loans; if the loan isn't repaid, the lender has recourse to recover their money through seizing the asset.
  • You can use a secured loan for anything. This is an advantage if you're looking for a loan to cover a specific purpose, such as consolidating debt, purchasing a vehicle, or even the help you get through a difficult period in your life.

The main disadvantage of secured loans is that your home or car can be repossessed if you default on your payments. This will not be an issue if you do repay your debt, but plans and circumstances can change even if you have secure employment and the best of intentions.

Overall, secured loans are a good option for people who need to borrow money. If you’re thinking of getting one, be sure to do your research and shop around to find the best deal available.

What happens if you can't pay back a secured loan?

If you are unable to pay back a secured loan, the lender will try to collect on the debt in several ways.

First, they will contact you directly and ask for repayment. If you are still unable to repay the debt, they may also contact a debt collection agency, who will also try to collect the debt from you. If you are in arrears for 3-6 months, they may go to court for an order of possession to repossess the asset the loan was secured against.

If this is a situation that you find yourself in, bear in mind that repossession is typically a last resort. It’s easier for the lender for you to repay, rather than having to jump through hoops to repossess your property.

Can you default on a secured loan?

Yes, you can default on a secured loan. If you default your property will be repossessed as per your secured loan agreement.

How to get a secured loan

The step by step process for getting a secured loan is as follows:

01. Step 1

Identify what you want to use as collateral for your secured loan. You aren’t obligated to use one kind of property over another if you have more than one asset.

02. Step 2

Research your options and compare different lenders to find the best deal. There are hundreds of sources through which you could find a secured loan, depending on your circumstances. Comparing online or consulting with a financial expert may help you narrow down your options.

03. Step 3

Choose the lender you want to work with and apply for the loan. Be sure to have your documentation in order and make a plan for repayment.

04. Step 4

If approved, sign the loan agreement and receive the money. It can often take several days or weeks for the money to be deposited into your account.

05. Step 5

Begin making payments on your secured loan according to the terms of your agreement. Typically, this will begin the month after you receive the loan, but check the exact terms of your loan agreement carefully.

Defaulting on a secured loan can have serious consequences, so it’s important to make sure that you can afford the repayments before taking out a loan.

Be sure to read over your loan agreement carefully before signing it. This document contains everything you’ll need to know about your loan, and it’s certainly worth looking into thoroughly.

Where can you get a secured loan?

If you’re interested in taking out a secured loan, the best place to start is by talking to your bank or credit union. They will be able to tell you if you qualify and what kind of interest rate you can expect to pay. You can also check with online lenders, although make sure you only work with reputable ones.

To compare offers, look at the Annual Percentage Rate (APR), which includes the interest rate plus any additional fees. The lower the APR, the better. Also, be sure to read the fine print before signing any loan agreement.

Can you get a secured loan if you gave debt already?

You can get a secured loan even if you have debt already. However, it’s important to make sure that you will be able to afford the repayments on both the new loan and your existing debts. If you’re not sure, it’s a good idea to speak to a financial advisor to get help with budgeting and working out what you can afford to repay.

An advisor pointing to a screen displaying Rep APR.

APRs from 5.8% to 89.9%

We are a broker, not a lender.

Unsecured Loan Representative 69.9% APR

Borrowing £7,500 over 36 months, repaying £502 per month, total repayable £18,083. Total cost of credit £10,583. Interest rate 69.9% (variable). The lenders on our panel offer loans for 12-60 months, with rates from 5.8% APR to 89.9% APR. The Representative Example is based on all loans paid out by lenders between 19th Apr 2022 and 23rd Dec 2022.

Secured Representative 11.7% APR

If you choose to add fees to the loan: Assumed borrowing of £25,000 over 120 months, plus a broker fee of £2,500 and a lender fee of £250 would result in monthly repayments of £345.55, the borrowing rate is 8.6% (variable), the APRC is 11.7% (variable), total charge for credit £16,466.00 and the total amount payable £41,466.00. You can opt to pay the lender and/or broker fees upfront, your adviser will discuss these options with you.

Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any debt secured on it. All rates vary subject to loan amount, loan type and status. Repaying your debt over a longer period of time may increase the amount you pay.

Further reading

What are the Different Kinds of Unsecured Loans?

Understand what an unsecured loan is, and how best to use the different kinds of unsecured loans in 2023.

What are the Different Types of Secured Loans?

With so many different types of loans available, it can be difficult to know which is right for you. For more information on secured loans, read this expert article.

Persistent Debt – What Does it Mean for Your Credit?

Persistent debt can affect your credit rating for a significant time period. Read to find out more.