A secured loan is a type of loan, that the person or organization who lends you the money, secures it against something you own. This could be your house, car, or some other valuable item you own. If you don’t pay back a secured loan, the lender has the option to take what you secured the loan against, so that the lender can get their money back by selling it. With a secured loan, you are usually allowed to borrow more money than if you applied for an unsecured loan (i.e. unsecured loan is a loan that does not have anything secured against it), you can also take out a secured loan for a longer period of time than for that of an unsecured loan. Interest paid on a secured loan is sometimes offered on a variable basis, this means that your repayments could vary over the course or the term of the secured loan, going either up or down.

It is sometimes thought that secured loans are safer than unsecured loans, but think about it. It might be better for the lender, as they have the reaasurance that if you default on the repayments, they can repossess your house as payment for the loan. This is not very reassuring for you though, as you are risking your house collateral against the loan. However, if you are looking to take out a loan of over 25,000 GBP, the majority of lenders will only make loans of this amount against some kind of security (i.e. a secured loan).

Now, don’t all of you rush off to take out an unsecured loan thinking that your happy home will be safe, even if you default on the unsecured loan. In some cases the lender, your creditor, could get a charging order against your home, even though you did not at any time offer your home as security against the loan. What this means is that when your house is sold, before you can get your hands on the proceeds, your outstanding debt has to be paid off first. More good news, if the lender manages to get a charging order against your property, they can get a court order forcing the sale of your home, so that they are repaid with the proceeds from the sale, and you are left homeless out on the street. If the judge is feeling generous, he/she may allow you to sell your own property. Because there is a lot of hassle involved to reposses your home, if you do not pay back an unsecured loan, it is far more difficult to obtain a court judgement than if the loan was secured. However, think about the fact that difficult does not mean impossible, so it can still happen.

What types of secured loan are there?

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Homeowner Loan - This type of secured loan is most usually taken out by people who cannot get any other type of loan, due to a bad credit history. The amount of money that can be borrowed with a secured homeowner loan is worked out on how much equity there is in the property which is to be used for security (equity = present value of the property minus the outstanding mortgage). There are also lenders that will lend 125% of equity, but at the cost of a higher interest rate.

Title Loans - This type of secured loan is when the lender takes out a lien against the title of your car or other property. What this means is that the lender is considered to be legal owners of the vehicle or asset until you have paid off the loan. The bad news is that if you don't pay the loan back in time, then the lender is able to repossess the vehicle or asset. If you don't pay them back after they've repossessed the vehicle or asset (as well as paying the repossession fees), then they're free to sell the vehicle or asset in order to get their money back.

Secured Car Loan - This type of secured loan is when you take a loan out for buying a car. Once again, if you take out a loan against your car, you must pay off the loan before you can sell the car.
(lien = a form of security given against an item to secure the payment of a debt. The owner of the property, who grants the lien, is referred to as the lienor and the person who has the benefit of the lien is referred to as the lienee.)

The Pawn Shop - This type of secured loan is when you use any of your possessions as security against a loan. This could be anything of value and could include such things as rings, the family jewels, TV, suit, mountain bike etc. When you visit your local friendly pawn shop (only joking), the proprietor will give you an estimation of what the value of the item to be pawned is worth. This valuation will be far lower than the actual value of the item. If you agree with the valuation, then the pawnshop lends you the amount of the valuation and keeps your possession as security. When you pay the loan back plus interest and fees to the pawnshop (usually within 30 days), you get your property back. If you haven't paid back the outstanding loan to pawn shop, usually within 90 days, your property is put up for sale and goes into the pawnshop window.

Consolidation Loan - This type of secured loan is used when people, who have amassed a number of debts from credit and debit cards, and unsecured loans, want to ‘consolidate’ them into one single secured loan that is repayable for an extended period of time. The interest rate offered by the secured loan is very often quite a bit lower than the interest charged by the credit and debit card providers. However, just how much lower will depend on the individual circumstances of the individual borrower.

Now, if you remember, we mentioned earlier in the guide about fixed and variable rates of interest. If you are considering taking out a consolidating loan to cover a personal unsecured loan as well as credit card debt, then you are exchanging a fixed rate loan for a variable rate loan, and probably be paying the consolidating loan off for a longer period of time, during which your house will be acting as security and as such, subject to repossession if you don’t service the loan. Always check out just exactly what the interest rate for the secured loan is, and what impact it has on the total amount to be repaid, so that you know exactly what you are taking on. Also remember that although spreading your monthly repayments over a longer period of time reduces each monthly payment, the actual amount of money paid back in interest, increases dramatically.

What is the cost of a secured loan?

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Now, we have all heard the term “Every one has to make a living”, but some lenders make a better living than others by charging higher interest.

Lenders put interest on the amount you borrow from them. The amount of interest is expressed as a percentage and called the Annual Percentage Rate (APR). Just how much the lender will lend you, and how much it will cost you, depends on your personal set of circumstances, how much equity you have in your property, your salary, and your credit history. When APRs are quoted, they are usually quoted as typical rates, and are only a guide as to what you will actually be offered. The definition of the word typical, when used in conjunction with APR, is that over 66% of loans arranged by the lender have been lent at the typical APR interest rate. Because secured loans have a variable rate of interest as opposed to unsecured loans, which have a fixed rate of interest during their term. This means that the repayments are usually lower for secured loans than for unsecured loans. However, keep in mind that payment can go up as well as down due to variations in the base rate, as well as at the discretion of the lender.

The maximum amount you can borrow with an unsecured loan is 25,000 GBP, whereas with a secured loan, you can borrow up to 75,000 GBP and in some cases 100,000 GBP. Secured loans have longer repayment terms, typically from 5 – 25 years, whereas on the other hand unsecured loans offer shorter repayment terms from 6 months up to 7 years.

What exactly is secured against a loan?

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There are two types of security when talking about using property as a means to acquire a secured loan.

First Charge means that if more than one loan is secured against the property, the lender who holds the first charge, has the first right to the property, if the borrower cannot or refuses to pay back the outstanding loan.

For example, the purchaser of a property takes out a mortgage to pay for it. The mortgage provider now has a first charge against the property, if the owner of a property decides to take out a secured loan using the property as security. The lender of the secured loan would hold a second charge on the property as security, which means that the lender would be paid out of the proceeds of the sale of the property after the mortgage provider. This is why most secured loan providers only lend an amount that is equal to the equity in the property (equity = present value of the property minus the outstanding mortgage), although some lenders will lend up to 125% of equity held in a property. If there were no mortgage associated with the property, then the lender of the secured loan would hold a first charge against the property and would be first to be paid out after the property had been sold to pay of the owner’s debts. Loans secured against property that is already mortgaged, are known as second charges, whereas loans secured against a property owned outright with no existing mortgage in place, are known as first charges. To qualify for a secured loan using a property as security, the property must be able to be sold by the lender if you default on repayments of the loan. There is no security for the owner, he/she is under pressure to repay the loan, otherwise the property will be sold to pay the lender the outstanding debt. A lot of security for the property owner there then! And don’t think that just because you are up to date with your mortgage, you are safe from repossession. If you have taken out a secured loan and used your property as security, if you fall behind with the repayments and cannot pay the loan back, the lender of the secured loan has a second charge against your property and can still repossess your home, so as to sell it to pay back your outstanding debt.

Who are the regulators for secured loans?

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For those secure loans that hold first charges against property, for example mortgages, the Financial Services Authority (FSA) are responsible for regulating the secured loans.

For those secured loans that hold second charges against property for secured loans, and those secured loans that hold first charges, taken out by people who own their property outright, The Office of Fair Trading (OFT) regulates under the Consumer Credit Act 1974 ( CCA). However, at present the CCA only covers loans up to a value of £25,000. Loans for sums greater than £25,000 are unregulated. For regulated loans of under £25,000 the lender must provide a consideration (cooling off) period of 7 days.

At this moment in time, there are no plans to increase the Financial Services Authority (FSA) responsibilities within the secured loans sector. So the good news is that the Consumer Credit Act 2006 contains certain provisions to get rid of the 25,000 GBP ceiling. This in turn would increase the range of regulated credit. Following on from this, the 1974 CCA would then be able to regulate all consumer loans of whatever value, provided they are not for business purposes or a first charge mortgage.

The 1974 CCA polices the credit market in two ways, by licensing traders and by setting rules and regulations. Traders must be fit to hold a consumer credit licence, and those traders who are deemed unfit by the OFT, for example, because they have convictions or breached consumer legislation, will either be refused a licence or have their licence revoked.

What do I need to do for a secured loan?

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Paperwork, more paperwork, and yet more paperwork, you will need to provide the lender of the secured loan certain information, this varies from lender to lender but basically you will need a document showing where you live, a document showing your age, pay slip, or bank statement showing salary details, proof of ownership of your property. You will be required to sign a credit agreement, and like all legal agreements, it should be read very carefully to make sure that you understand just exactly what you are signing for. The lender of the secured loan will pay particular attention to how much you earn and what outgoings in the way of commitments you have. They will check out your credit history and will weigh up the implications of any County Court Judgments (CCJs), mortgage arrears or defaults.

If you are married or in a civil partnership, the lender of the secured loan will insist that both parties have their name on the application form, in case of any disputes where one partner defaults on the secured loan, and when the lender tries to exercise their right of repossession of the property in order to sell it, and the proceeds used to repay the debt, the other partner successfully stops it happening by claiming that he/she was not aware that his/her partner had taken out a secured loan in the first place.

What are the plus points regarding a loan?

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One advantage is that increasing the amount of time that the secured loan has to be paid back, can lower the monthly repayments. But wait a minute, the longer you take paying back a secured loan, the more you pay back in interest, more like a swings and roundabout situation. Then there could be the case of a borrower that runs into credit trouble with his/her mortgage provider. If the borrower decides to re-mortgage his/her property, the borrower could incur a higher rate interest from the new mortgage lender for all the borrowings. In this case the borrower would probably be better off taking out a secured loan rather than re-mortgaging the property. In the majority of cases, lower interest rates for secured loans are offered to people with a good credit history, but even those people with a bad credit history can obtain a secured loan because of the security to the lender that a secured loan offers, the price that someone with bad credit history will have to pay will be higher interest rates to service the loan.

There are other advantages between taking out a loan secured against your property rather than re-mortgaging your property such as:

You may have only a small amount of equity left in you property and some secured loan lenders offer to loan you up to 125% of the value of the equity in your property.
A re-mortgage lender limits what you can use the re-mortgage for, secured loans can be used for any legal reason.
Your current mortgage may have penalty charges for early repayment, especially if you have agreed to a special offer which is in force for a certain period of time.

What are the minus points regarding a loan?

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Interest rates on a secured loan will be higher compared to interest rates for a mortgage, and in some cases unsecured loans. This is mainly due to the fact that the lender of a secured loan only has a second charge against the secured property, and can also be attributed to the additional risk the lender is taking by granting a secured loan to someone with a poor credit history. What this means to the individual taking out a secured loan, is that a lot more interest is paid out during the term of a secured loan, rather than for an unsecured loan. Furthermore, if you use a secured loan to purchase such things as a car, TV, holiday etc, you may end up saddled with the debt long after the goods you bought have worn out.

Some other minus points include:

Penalties for early redemption.
The additional money you are paying out may encourage you to take out further loans.
There are likely to be upfront costs like valuation and arrangement fees.

What are the other ways I can use finance?

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There are a number of various ways other than secured loans that can be used to raise finance. If you are looking to raise a lot of money, then your first port of call should be to your existing mortgage provider to investigate the possibilities of a re-mortgage, failing that, look around at other mortgage providers and check them out to see whether they will arrange to re-mortgage your property. Either way, the interest rate offer is most probably less than those offered to you for a secured loan against your property.

Other ways to reduce your financial outgoings is to transfer your credit card balance (if you have one) to a credit card that charges lower interest rates.

Always check out all the other options before deciding on a secured loan.

Remember

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.

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