Second Charge Loans
The most common type of security used in secured borrowing is the applicant’s home, though other assets of value may be considered by specialist lenders. Secured loans are relatively simple agreements, whereby the lender takes ownership of the security (or collateral) if the borrower fails to repay the loan.
When would you need a Secured Loan
- Home Improvements from light refurbishments to extensions
- Raise deposit to purchase a second property
- Debt Consolidation
- Capital injection into business
- Repay loans on a help to buy scheme or other government funded schemes
- Bad credit where you might not get a personal loan but could borrow against your property
- Where income source is non-confirming or from multiple sources
- Funds can be raised for any reasonable reason
Secured Loans Pros & Cons
Advantages of a Secured Loan
- Larger loans – it allows you to borrow more than personal loans which are usually up to £25,000
- Long term – similar to a mortgage, it will allow you to borrow funds for a longer term (depending on your expected retirement age/retired income) which in turn helps to keep a more manageable monthly payment, making it more affordable by spreading the cost
- Borrow more than standard mortgages – Lenders of secured loans will typically allow you to borrow more using higher income multiples or higher loan to values or both
- Lower rates compared to certain other types of finance such as credit cards and certain personal loans
- Allows you to keep your existing low rate mortgage product
- Cheaper alternative to remortgaging as you might be tied into your mortgage product and have high exit charges
Disadvantages of Secured Loans
- Interest rates can be higher than a mortgage
- Upfront costs such as lenders arrangement fees and valuation charges
- As monthly payments are spread over a longer period compared to a short-term unsecured loan, you may end up paying more in the long run
- Using the equity in your asset
A typical example of a secured loan is a mortgage, wherea loan is issued against the agreed market value of the property. As the lender effectively has an insurance policy in the form of the security (in this case the borrower’s home), secured loans can be issued at highly competitive rates.
When the loan is repaid in full as agreed in the contract, the lien is lifted, and the borrower retains full ownership of their property. If the borrower defaults on their loan or breaches their contractual obligations, the lender may begin the process of seeking repossession of their home.
Therefore, it is of the utmost importance for secured loan applicants to understand their obligations and carefully consider their budgets, before entering into a secured loan agreement of any kind. Most secured loans are long-term agreements and must be approached with due care and attention to limit the risk of forfeiture of assets.
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As everyone’s individual circumstances vary, it is very important that the decision to borrow any finance is made after careful consideration. As the loan is secured against your property it may be at risk of getting repossessed if regular payments are not maintained. It might be prudent to take out an insurance policy to protect the secured loan in the event of illness or redundancy.
Frequently Asked Questions
What is a secured loan?
A secured loan is a long-term borrowing product that requires some type of collateral as insurance for the lender. If you are looking to borrow a substantial amount of money over an extended term then a secured loan or homeowner loan might be the suitable option. Although secured borrowing products are typically much cheaper than their unsecured counterparts (such as personal loans), the borrower runs the risk of losing their home if they find themselves unable to make monthly repayments on time. There are several advantages to secured credit however, which include increased borrowing amounts, comfortable repayment options, better availability and lower interest rates.
Can I apply for a secured loan?
If you are a UK resident and you are homeowner or mortgage holder with enough equity in your property to serve as security against the loan then the answer is yes!
What is the difference between a secured loan and an unsecured loan?
The primary difference between a secured loan and an unsecured loan is that you do not need to provide security to take out an unsecured loan, it is normally solely based on your credit history and affordability. Nevertheless, you could still find yourself in a position where you have to sell your assets, in order to clear your unsecured debts. In addition, unsecured loans are usually available for significantly smaller sums of money than secured loans. As a rule of thumb, secured loans also have more competitive rates of interest, as the assets used to secure the loan represent an ‘insurance policy’ for the lender. In the event that a secured loan is not repaid as agreed, the lender is legally entitled to take ownership of the assets/property used to secure the loan.
What should I consider when taking out a secured loan?
If you’ve decided to take out a secured loan, it’s essential that you compare the market in full to find the best possible deal. This means taking into account all borrowing costs, conditions and general loan terms, along with the Annual Percentage Rate (APR) itself. Factors to consider include whether it is a fixed rate loan or variable, the repayment period over which you will repay the loan, whether there is the option of repaying the loan early with or without a penalty, the extent to which your credit score will affect borrowing costs and so on. You may also wish to consider the value of the assets you use to cover the costs of the loan. Normally, the bigger the difference between the loan size and the value of the security i.e. Loan to Value (LTV), the more competitive the APR and borrowing costs may be.
Can secured loans build credit?
The vast majority of financial products, including secured loans, can be used to build or repair your credit rating. It’s simply a case of ensuring you fulfil your responsibilities, make every payment on time and perhaps even overpay where possible. However, there may be more effective and sensible ways to improve your credit score than to take on additional debt. Contact one of our advisors for more information.
Can secured loans be consolidated?
It is possible to consolidate almost any type of loan, as part of a wider debt consolidation agreement. Whether or not it’s a viable or advisable option will be determined by your financial circumstances at the time. Due to the potential risks involved in all types of secured lending, it is important to seek independent advice before making such an important decision. Particularly if you are struggling with one or more existing debts, it is vital that you carefully and objectively consider all available options.
How many secured loans can I have?
If you are in a strong financial position and you handle your debts responsibly, there are technically no limitations regarding how many secured loans you can have. Nevertheless, it is your responsibility and that of the lender to ensure the borrowing is sensible and that you are not out of your depth from the outset. Always remember that just because you can take out another secured loan doesn’t necessarily mean you should. If you have one or more existing secured loans and are considering applying for another, speak to an independent adviser before going ahead.
Can I get a homeowner loan if I’m in negative equity?
It is possible that you will qualify for a 2nd charge homeowner loan if you do not have any equity in your property. Certain 2nd charge lenders will allow a loan higher than the value of your home. In such instances, you will need the help of an independent adviser.
What happens if I miss repayments on a secured loan?
Missing payments is likely to result in penalties, elevated overall borrowing costs and a potentially heavy hit to your credit report. If you miss payments on a regular basis or fail to make several consecutive payments, the lender could seek to take possession of your home through the courts. If you encounter or anticipate even the slightest difficulties repaying your loan, it’s essential that you contact your lender immediately to discuss the available options.
Can I pay off my secured loan early?
The option to repay a secured loan early almost always exists. However, lenders could impose heavy ‘early repayment ‘charges’. This is therefore one of the most important conditions to take into account when applying for a secured loan. If you’d like the opportunity to repay your loan early, ensure the lender doesn’t penalise early repayment excessively or if they do, you are fully aware of by how much.
What is the difference between a secured loan and a second mortgage?
Secured loans and second mortgages are technically the same, using the home you live in (or another property you own) to secure the loan. If you are currently repaying a mortgage loan on your home and you take out a second secured loan on the same property, you’re essentially taking out a second mortgage. This is why the underwriting process for this type of secured loan is similar to that of a conventional mortgage application.
What happens if I cannot repay my secured loan?
Again, it is essential that you contact your lender the moment you encounter or anticipate any repayment difficulties. If the issue is temporary, the lender may be willing to discuss some kind of deferred payment plan or flexible agreement. If you cannot repay your secured loan as agreed and no new agreement can be reached, your property may be repossessed by the lender and sold to recoup the loan and accrued costs.
When is it a good idea to consolidate your debts?
It is worth considering consolidation in any instance where several debts have accumulated over time and have become difficult, expensive and complicated to manage. If the rate of interest available on a consolidation loan is lower than the interest rates on your existing debts, consolidation could save you time, effort and money. You may also wish to consider consolidation if your current debts are causing you to miss or delay payments on a regular basis, which could be having a detrimental impact on your credit score. Nevertheless, it’s important to acknowledge consolidation as a form of debt in its own right. If you’re struggling with your existing debts and considering consolidation, consult with an independent adviser to explore the available options.
Are there any early repayment charges I should know about?
If you are approved for a secured loan and you intend to settle the balance as quickly as possible then it’s always a good idea to let us know beforehand so that we can find the most suitable product based on your individual needs and requirements. Most lenders have early repayment charges that are equivalent to 8 weeks of interest on the remaining balance at the time of repayment. However, the actual rates can vary considerably from one lender to the next.
What can the loan be used for?
A secured loan can be used for absolutely anything – as long as it is within the law. Home improvement, the consolidation of debt and the financing of once-in-a-lifetime holidays, weddings and other celebrations are just a few of the reasons that people apply for this type of credit. As long as you can pay the loan back and you have the required security, most lenders are completely indifferent as to why you are applying for finance.
How long can I borrow for?
Whereas most unsecured loans are only available between 1 and 5 years, secured loans have much longer repayment options available. With a secured loan, you typically have between 5 and 25 years to repay the outstanding balance, although it is important to remember that you will obviously be charged more interest for an increased loan term. However, the monthly repayments themselves will be more affordable the further you stretch them out.
If I apply, will it affect my credit score?
If you apply for multiple loans in a short period and are continually rejected then most lenders will be somewhat suspicious of your behaviour and reluctant to deal with you. However, when you apply for a secured borrowing product using our services, we only perform a soft credit check, which although recorded on your file, should not be visible to other lenders. Of course, once you are approved and decide to proceed with your secured loan, the information will be officially registered and available to anyone looking at your file.
What does loan to value mean?
The LTV amount, or Loan to Value, is a simple tool used by mortgage providers and other lenders to calculate the value of a loan in relation to the security you are offering. For example, if you owned a property outright and the open market value of this property was £100,000, a loan of £70,000 would be a 70% LTV product.
What is a variable rate loan?
A variable rate borrowing product is any mortgage or loan where the interest rate is subject to change over time – typically because it is tied to the Bank of England base rate or LIBOR rates. Unlike fixed rate products which offer reduced repayments over a set period (such as the first 2 years), variable rate mortgages and loans do not have a set cost. If the Bank of England decides to increase the base rate by a significant amount and you have a variable rate product then you could find that the cost of borrowing is no longer affordable. However, at the time of writing the Bank of England interest rate is at the lowest it has ever been, which is great news for borrowers looking to save money on finance.
What is a debt consolidation loan?
Secured loans often represent a much more affordable way of borrowing that most other types of credit. If you have a large number of unsecured debts, such as credit cards, store cards, hire purchase debts and personal loan repayments to make each month and you want to reduce your outgoings then you can use a secured loan as a means of consolidating those debts. The advantage of doing this is that the number of repayments you are expected to make each month is reduced to just one singular repayment and the cost of the debt itself is also reduced. You can also stretch the repayment period over an increased number of years, although this will obviously cost you more in the end.
How quickly can you approve my application?
At UK Property Finance, we can typically make a decision to lend in less than 20 minutes although the actual approval itself will depend on whether or not you decide to proceed with the application, alongside a number of other factors. Once you have applied for a secured loan using our services, we will provide you with a shortlist of suitable products from the whole market, which you are free to accept or reject. Once you decide to proceed, we work fast in order to ensure you receive the funds you need as quickly as possible.
So when will I actually get my loan?
Most secured loan applications take around 14 to 21 days to complete, with the funds released at the end of this time. However, UK law demands there to be an 8 day cooling off period which gives you the opportunity to change your mind once your application has been accepted and approved. Once you have been approved in principal and the cooling off period has been observed, you will then receive the relevant paperwork to sign and everything should move along swiftly.