A secured loan is a type of loan where you use the available equity in your home, as collateral. The lender who provides the loan will place a ‘second charge’ on your property that sits behind the first charge placed by your mortgage provider. This means the lender who provides the loan has a claim on the asset if you can’t repay the loan. They work similarly to a mortgage, which is why they are often referred to as a ‘second mortgage’.
Secured loans are useful if you want to borrow larger amounts, are looking for a much lower interest rate, and want the loan repayments spread over a longer term than other types of loan. This is all achievable with a secured loan because the lender’s risk is greatly reduced.
These loans are commonly used for home improvements, consolidating debts, or big purchases. Since your property is securing the loan, it’s important to ensure you can comfortably manage to make the repayments each month.
A secured loan – which is also referred to as a homeowner loan, second charge loan, second mortgage or home loan. They use your home as security, like your mortgage, making use of the equity you have.
The equity in your home is its value less the amount owed on your mortgage. This is also known as ‘collateral’.
Making use of the equity in your home reduces the risk for lenders as they will have a legal charge over your property. This means that if you default on your loan agreement, they could take you to court to request a repossession order.
Secured loans tend to be of a higher value, over a longer repayment term and at a lower interest rate, compared to unsecured loans, due to the security provided.
Secured loans uses vary, with people borrowing for a wide range of purposes. These include:
We offer access to secured loans ranging from £5,000 to £1 million.
The maximum amount that you can borrow will depend on the available equity in your home, your income and affordability and your credit history.
You can use our secured loan calculator to get an instant idea of the monthly repayments over your preferred term. This easy-to-use calculator will give you an initial idea of the monthly repayments and interest rate, based on the amount borrowed.
Before applying for a secured loan, it’s helpful to consider the following:
A lender will want to know your financial status so they can assess whether you can afford the required monthly repayments for a secured loan. This will include asking questions about your income, outgoings and debts.
When applying for a secured loan, the lender will also want to know how much equity you have in your property. This is done by calculating the difference between the value of your home and how much of the mortgage still needs to be repaid. In most cases, the more equity you have, the more you will be able to borrow.
If you have a poor credit rating this won’t necessarily affect your chances of getting a secured loan. However, lenders will want to know more about any CCJs and your borrowing history in general.
You should have a clear idea of what you want to use the money for, as some lenders have a list of acceptable and unacceptable reasons for borrowing the money.
There are a few eligibility factors you must meet to qualify for a secured loan:
There are many reasons to consider taking out a secured loan against an asset you own, especially if you need:
It’s an option that many people use to resolve a wide array of financial concerns, be it to reinvest into their home for small improvements like a new kitchen or bathroom to major renovations like a complete refit throughout, kitchen extension, extending your land and landscaping the garden. They are also one of the most popular ways to consolidate debt, or use the funds to invest in a second property.
We look at 10 reasons why it may be helpful to consider taking out a secured loan.
If you apply for an unsecured loan, you may find that you are unable to borrow more than a maximum of £25,000. Whilst this may be enough for many circumstances, the repayment terms of up to 7 years, and high interest rates, may make budgeting tight.
When it comes to secured lending, some lenders – such as KIS Finance – could let you borrow from £5,000 up to £1 million, provided you can use an asset with the appropriate equity and affordability criteria is also met.
You may be able to borrow at least up to 100% loan to value when taking into consideration the open market value of your home and your outstanding mortgage balance.
This will of course depend on the lender and their lending criteria,
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Compared to unsecured loans, it is often the case that a secured loan lender will be able to offer a much lower interest rate. This is because the risk involved for the lender is significantly reduced thanks to the collateral provided by the borrower.
Your personal circumstances, including your credit history, will determine the interest rate you are offered by a lender. We have a range of plans to suit applicants with a poor credit history. These plans maybe a little bit more expensive than those available if you have a good credit history, but many of them still offer very attractive interest rates.
It’s often the case that if you are paying off multiple debts you will also be paying a variety of interest rates. And if you are close to your credit limits, a large portion of this could be considered to be ‘dead money’ that services interest rates before the debt itself.
Using a secured loan to consolidate your debts into a single monthly payment could make the payments more manageable. Instead of paying varying degrees of interest rates, there will only be one attached to the secured loan, so you always know where you stand.
If you apply for an unsecured loan or remortgage, your credit score will play a central role in determining the final outcome. If you have a clean credit history, then you will have many more options to choose from.
The difference with a secured loan is that lenders tend to be more flexible because you have provided collateral. So, instead of rejecting an application based purely on your credit score, they also place an emphasis on affordability.
Lenders will ask you to provide full details about any previous credit issues, and also show you can meet the financial obligations of the loan terms. Secured loans for bad credit typically come with higher interest rates compared to those offered to people with a good credit score, which can make them more expensive in the long run.
Main reasons for opting for a secured loan over a remortgage:
Part of the process of applying for a secured loan includes explaining why you want to borrow the money. Whilst unsecured lending has some restrictions on what you can use the money for, this is not the case with secured lending, provided it is for a legal purpose.
For example, you could use a secured loan to settle outstanding tax bills, invest in a second property or pay for a one-off personal purchase. Most lenders are not too concerned about how you use the money, and mostly focus on your ability to make and maintain the loan repayments.
A growing number of people are choosing to become self-employed, which can offer a host of personal and professional benefits. However, when it comes to getting a cash injection, it can create additional problems.
If you apply for a mortgage or unsecured loan, most lenders will not consider the application unless you have been self-employed for at least three years.
But applying for a secured loan could offer a better solution. Whilst you may still have to wait a little bit of time to access this type of lending, because you can offer personal assets as collateral, this gives lenders more reassurance, which allows your application to have a better chance of being accepted.
When you take out an unsecured loan, the lender will usually expect it to be repaid within a maximum of 5-7 years. This, in addition to the fact that unsecured borrowing also tends to have higher interest rates, having less time to repay compared to a secured loan, means you will have to manage higher monthly repayments.
Taking out a secured loan can allow you to spread repayments over a much longer period. And if you are aged below 45, the repayment period could be as long as 30 years. This will mean the loan will cost more overall, if it runs the full term, due to paying interest for longer, but it will mean lower monthly payments. This is useful if you are starting out in a new career or new business where money maybe tight to start with. As income improves you can of course increase payments to repay the loan more quickly, if you wish to do so.
Not only are secured loans a viable option for the self-employed, but they can also be a helpful solution for business owners. With a secured loan will likely be able to find better terms with lower interest rates when compared to a business loan, even if you haven’t built up a strong credit profile.
A secured loan could be used to buy key assets for your company to support business expansion or to support payroll during lean times. And if you’re happy to accept and early repayment charges that maybe a condition in the loan terms, you may even want to consider repaying it early if your business starts to take off.
Dealing with multiple unsecured debts can not only mean dealing with higher interest payments but it could also have a negative effect on your credit rating, which can make it difficult to secure lending in the future if you look like you are over committed.
Your credit score is influenced by several factors, which can be improved by a secured loan.
Consolidating multiple unsecured debts into one repayment via a secured loan can help your credit score by ensuring there are fewer open credit contracts against your name.
Having multiple lines of credit also means juggling the various payment due dates, which can be difficult to manage. Even if you miss a single payment on a credit card, it can have a detrimental effect on your credit score for a long time. If you only have a single payment date to remember, you are far less likely to forget it, or not have enough funds available in the right place to cover it.
It’s good to be aware of the differences between a secured loan and unsecured loan:
Taking out a secured loan can offer a host of benefits, depending on your financial situation. Not only could you borrow more but you could secure a lower rate of interest. Whilst some people use a secured loan to consolidate their debts, as long as the funds are used for legal purposes, there are no limits on how you spend the money.
If you feel that a secured loan could benefit you, get in touch with our friendly team who will be more than happy to answer any questions you may have.
Last updated: 28 November 2024 | © KIS Bridging Loans 2024