What is a secured loan and how does it work?

A secured loan is a loan that you take out and secure against an asset — usually your home, but holiday homes and buy-to-let properties can also be used.

The amount you can borrow will depend on the amount of equity that you have available (the percentage of the property owned outright by you), your income/outgoings, and your credit score.

Once the loan is taken out, you will pay it back in monthly instalments over a term of about 3 to 25 years. Monthly payments will be a combination of capital and interest so when the term has ended you will have paid back the loan and interest in full.

How much does a secured loan cost?

When you take out a secured loan you will have to pay a few upfront fees. This will include all, or a combination of, the following:

  • Admin fee (you may have the option of adding this to the loan facility).
  • Lender product/arrangement/booking fee (you may have the option of adding this to the loan facility.)
  • Valuation fee
  • Broker fee (if you use a broker, some charge fees.)

You will also have to pay interest on the loan. The interest rate will be dependent on the amount you’re borrowing, your credit score, and the overall circumstances of the loan.

To get an accurate estimate of how much a secured loan will cost, use an online secured loan calculator.

What can I use a secured loan for?

A secured loan can be used for any reasonable and legal purpose, so essentially, anything you want.

Common uses for a secured loan are:

  • Home improvements
  • Raising a deposit for a second property
  • Debt consolidation
  • Capital injection into business
  • Exit for an existing bridging loan
  • New car
  • Wedding costs

Can I get a secured loan if I have a bad credit score?

Because of the security element, it is possible to get a secured loan even if you have a bad credit rating.

The amount of equity you have in the property and your income both play a large part in the lender’s decision-making process, so it’s not only down to your credit history. However, it may affect the interest rate and terms that you’ll be offered.

What is the difference between a secured loan and an unsecured loan?

A secured loan, as the name suggests, is secured against an asset (usually property) whereas an unsecured loan is not.

The security element makes secured loans far less risky as the lender has a way of getting their money back if you default on the repayments. Therefore, secured loans usually have better terms and lower interest rates than unsecured loans.