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How Does a Secured Loan Work?

By Kev TilleyCeMAP

Last Reviewed: 15th October 2021

A secured loan is a loan that is protected by collateral. Collateral is a valuable asset that you pledge as security for the repayment of the loan. In most cases, you’ll secure a loan with the underlying purchase being financed, such as a home.

Once you qualify for a secured loan, the lender places a lien on the collateral, giving them the right to seize the collateral in case of a default. If you default on a secured loan, the lender can foreclose, repossess to recoup the outstanding balance.

As a result, a secured loan poses less risk for lenders, and they can extend the loan with lower interest rates and requirements than unsecured loans.

Features Of Secured Loans

A secured loan is an excellent option if you’re looking for large sums you can repay over a more extended period.

Features include:

Higher Loan Amounts

Secured loans allow you to access a large lump sum of cash than unsecured loans. The value of your asset can influence the amount you can borrow. Usually, the more valuable your property is, the more money you can borrow in a secured loan.

Low-Interest Rates

Thanks to the lender’s low risk in a secured loan, you can access more favourable interest rates. Repayments in a secured loan are also spread over a long period. Lenders can make their money over the long term, making them more willing to advance secured loans at attractive interest rates.

Instalment Payments

While short-term unsecured loans may require you to repay in one lump sum, secured loans are repaid in small manageable instalments over the loan’s term. Lenders will outline a repayment plan when entering a secured loan agreement, making it easy to plan monthly payments. The instalments are usually fixed and will include a portion of the principal amount plus interest spread evenly over the loan’s duration.

Uses Of A Secured loan

A secured loan provides you with cash to cover anything, whether big or small.

Common uses of secured loans include:

Personal and Business Needs

Businesses usually need a cash injection for current and future needs like purchasing resources, stock, equipment or expansion into new premises. A secured loan can come in handy when you need a financial boost for your business.

Secured loans can also finance different personal financial needs and purchases. You can use it to buy a home, car, advance your education, finance a family vacation or the wedding of your dreams.

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Home Improvements

Funding a home improvement project can be expensive, but it’s a great way to reinvest and improve the value of your property. A secured loan can help you cover the costs of your desired or needed improvements.

Whether it’s a new kitchen, bathroom, extensions, conversions, repairs or maintenance, a secured loan can help you fulfil your needs.

Debt Consolidation

Debt consolidation involves streamlining multiple debts into one debt. Instead of dealing with different creditors every month, you acquire a loan to cover the total debt and make a single payment to a single lender monthly.

If you’ve been struggling under the weight of multiple high-interest debts, a secured loan can help you consolidate your debts and give you a breath of fresh air. It will provide the funds to pay down your debts and drastically reduce your monthly expenses.

Multiple debts become easier to manage because you only deal with one lender instead of many with an extended repayment period and favourable interest rates.

Secured Loan with Bad Credit

A secured loan has less rigorous qualification requirements than an unsecured loan. You can still qualify and get approved even with a bad credit history because the collateral significantly reduces the lender’s risk despite your credit score.

Whether you have a negative credit score due to defaults, late payments, or county court judgements (CCJs), you can still access a secured loan. If you’ve been denied a loan because of your credit history, consider providing an asset as collateral to improve your chances of approval.

Unlike unsecured loans, credit score requirements in secured loans are generally lower. Loans advisors can even connect you to lenders who specialise in offering secured loans to borrowers with bad and non-existent credit scores. They work with you to ensure you get an affordable secured loan that you can quickly repay and improve your credit score!

Types Of Secured Loans

You can access different types of secured loans in the UK, including:

• Homeowner or home equity loans

It involves getting a further advance on your mortgage and borrowing additional amounts from your current mortgage lender against your home. They can come in handy when you need to make home improvements or raise a deposit for a second or more expensive home.

• First and second charge mortgages

First charge mortgages involve taking out a loan against your home when you have no existing mortgages. With second charge mortgages, you set up a separate agreement from your current mortgage, either with an existing mortgage lender or a different one.

What Happens If You Don’t Repay a Secured Loan?

The most significant risk of defaulting on a secured loan is losing your home. The lender seizes the collateral and can sell it as a last resort to recoup the outstanding balance.

If it’s a mortgage, they can file a foreclosure action against you.

Because the collateral’s value meets or exceeds the loan amount, the lender has higher chances of limiting their losses if you default.

If the sale of the collateral doesn’t cover the total outstanding balance, you’ll still be liable for the remaining amount. Lenders can attempt to recover the difference through legal actions where you’re prosecuted in court. Your credit will be impacted negatively, and repossession can stay in your credit report for up to six years in the UK.

How To Get The Best Deal On A Secured Loan?

Before taking out a secured loan, it’s essential to review your income, existing debt payments and budget to determine whether you can afford monthly repayments.

After determining how much you can afford to borrow, shop around for the best loan. Research the cost of borrowing, the terms and conditions of each loan and the consequences of being unable to repay.

Look for lenders who offer prequalification without hard credit checks that will impact your credit score. Eligibility checkers, soft credit searches or quotation searches are helpful when you’re shopping around and not ready to apply. They’ll not show up on your credit reference file.

Secured Loans – How Can We Help?

There’s no doubt that secured loans are great for those with bad credit but as mentioned previously, taking out a secured loan is a major life decision that’s not to be taken lightly and nobody should have to make that choice alone!

Give us a call on 01925 906 210 and we will provide you with the best deals available to meet your circumstances and consider any credit history you may have. With our expert advice, we can guide you through the process and give you the knowledge and confidence it takes to acquire a secured loan that is right for you.

If you have read all the information on secured loans carefully and feel that you want to proceed with a secure loan, get in touch with one of our secured loan experts who can work with you to find the best deal for your needs and circumstances.

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Whether you need a homeowner loan or a mortgage on a property, all our quotes are free and given with pleasure.

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