Secured Loans FAQs
Answers to some of our most commonly asked questions about Secured Loans
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.
For those of you who have questions regarding secured business loans, find all the answers you need below:
How Do Secured Business Loans Work?
Secured business loans work in a similar way to mortgages, but in this instance the applicant must already own an asset of sufficient value to cover the value of the loan. Business loans can be taken against a wide variety of assets, often land, residential and commercial premises.
A valuation is carried out to verify the value of the asset, at which point the lender will offer a loan of the required amount. If the loan is fully repaid in accordance with the terms and conditions of the agreement, the borrower retains ownership of their assets. In the event that the borrower defaults on the agreement, the lender has the legal right to repossess the assets.
Terms, conditions and interest rates vary from one product and lender to the next, emphasising the importance of shopping around with the support of an independent broker.
How Much Can I Borrow?
Maximum loan amounts are typically restricted only by the value of the asset (or combination of assets) offered by the applicant. Lenders will offer a percentage of the asset value dependent on criteria.
It is worth noting that the bigger the percentage difference between the value of the security compared with the size of the loan, the lower the interest rate. As the asset provided by the business is effectively the insurance policy covering the loan, high-value assets are usually preferred by lenders.
Which Types of Security Are Accepted by Lenders?
Lending policies vary significantly from one lender to the next, with regard to which types of security are suitable for a loan.
Tangible assets include the most common forms of security like commercial or residential property or land. Some lenders may also be willing to accept the personal assets of the applicant as security, such as the borrower’s car or other high-value possessions like jewellery.
Intangible assets may also be accepted by some commercial finance lenders, which include non-physical securities like intellectual property, company shares, copyrights, patents and trademarks. Intangible assets can be more difficult to assign a formal and/or agreed value to than conventional physical assets.
Is Secured Lending Risky?
Applying for a secured loan means understanding and acknowledging the fact that your assets are at risk of repossession if you fail to keep up with your repayment requirements. This is why business loans should only ever be secured against assets where the applicant is 100% confident in their ability to comfortably repay the balance in full.
If you encounter any difficulties whatsoever while repaying a secured loan, it is vital to speak openly and honestly with your lender at the earliest possible stage. It is never in the best interests of banks and lenders to commence asset repossession proceedings as doing so is considered a last resort option only.
Will My Business Qualify for a Secured Loan?
Eligibility is established primarily on the basis of the value of the assets used to secure the loan. All lenders, however, have their own unique policies and criteria that must be fulfilled, which may include some combination or variation of the following:
- Your ability to provide evidence of asset ownership
- A minimum of three months’ trading history as a UK business
- You must be based in the UK at the time of application
- Evidence of a stable financial position (for poor credit applicants)
If you have any questions or concerns regarding your eligibility for a secured business loan, consult with an independent broker before applying. This will enable you to ensure you target the right lenders for your requirements, such as those who specialise in subprime business loans.
What Is A ‘Personal Guarantee’ and Do I Need One?
A personal guarantee may be required alongside eligible assets where the applicant operates a limited liability company or a limited liability partnership. It may also be possible to qualify for a secured loan with a personal guarantee alone, without the provision of assets to secure the facility.
Where personal assets are required as security for a secured business loan, most lenders are willing to accept residential & commercial properties and land. Others accept high-value possessions like jewellery and vehicles.
Is Property with An Outstanding Mortgage Acceptable Asset?
Yes, but it depends how much equity you have tied up in the property and the extent of the outstanding mortgage. For example, if you have repaid 75% of the property loan on a £200,000 property, you have £150,000 equity. A lender may therefore be willing to offer a high percentage loan secured against the equity you have in the property.
If, however, you have only recently purchased a property, you may have insufficient equity to qualify for a secured loan.
Can I Qualify Without Any Assets?
Secured business loans are provided exclusively on the basis of security. If you do not have any valuable assets (or assets considered eligible by lenders), you may still be able to apply for an alternative facility like an unsecured business loan.
In addition, it is important to remember that intangible assets like shares, intellectual property, trademarks and patents may be considered acceptable collateral by some lenders.
Where Can I Find Out More?
For a clearer indication of what to expect if you decide to go ahead, use our online secured business loan calculator. Simply enter the amount you would like to borrow, the approximate APR and the length of the repayment period to find out the total borrowing costs.
Alternatively, contact a member of the team at UK Property Finance anytime for an obligation-free consultation.