About Secured Loans / Second Charge Loans

Welcome to our comprehensive guide on secured loans. Whether you’re looking to purchase a new home, start a business, or consolidate your debts. Understanding the concept of secured loans is crucial. In this article, we’ll provide you with a detailed overview of secured loans. From their benefits, the application process, and important considerations. By the end, you’ll have a solid understanding of secured loans and how they can help you achieve your financial goals with confidence.

A secured loan (or second mortgage) is a way of borrowing using a property (often a home) as security. Around 20 lenders offer secured loans in the UK & are often referred to as “specialist lenders”. They are able to offer flexible underwriting terms & can often help those who have been turned down elsewhere.

Secured loans are financial products that require collateral to secure the borrowed amount. In simple terms, it is just like your mortgage. The loan is secured on property you own which a lender can repossess if you fail to repay the loan as agreed. The collateral provides a form of security for the lender. This reduces their risk and allowing them to offer more favourable terms compared to unsecured loans.

Contents

• Types and features of secured loans
• Secured loans – repayment methods and interest types
• Collateral: The Foundation of Secured Loans
• Why apply for a secured loan instead of a remortgage?
• Benefits of Secured Loans compared to unsecured loans
• Secured Loans – how to apply
• Common uses of secured loans
• What does the rate depend on?
• Considerations and Risks
• Secured Loans vs. Unsecured Loans
• Frequently Asked Questions about Secured Loans (FAQs)
• Conclusion

Types and features of secured loans

There are various types of secured loans available. In this article we focus on loans secured on property which encompass a variety of loan types tailored to specific borrowing needs. Here are the key types of secured loans:

Mortgages

Mortgage loans are secured by real estate properties, typically used for purchasing or refinancing homes. The property acts as collateral, allowing borrowers to access significant loan amounts with favourable interest rates and extended repayment terms. Mortgage loans offer options such as fixed-rate mortgages, variable rates, discounted rates and many other variations. More information is available on our mortgage pages.

Secured Homeowner Loans

Also known as home equity loans, second charge loans or second mortgage loans. These allow homeowners to tap into the equity built up in their property. The loan amount is determined based on the difference between the home’s market value and any outstanding mortgage balance. Secured loans provide borrowers with a lump sum of money that can be used for various purposes. Such as home improvements, debt consolidation, or major expenses. Interest rates are generally lower than unsecured options and the repayment term can be longer. Where borrowers have a bad credit history.Secured loans can be much more accommodating than a mortgage or an unsecured loan.

Secured Business Loans

Small business owners often utilise secured loans to access capital for business expansion, purchasing equipment, or covering operational costs. They are normally secured on the business owners home or other commercial or investment property. However, collateral can include business assets such as vehicles, plant and machinery, inventory, or accounts receivable. Secured business loans generally offer competitive interest rates and longer repayment terms, helping entrepreneurs manage cash flow and grow their businesses.

Secured loans – repayment methods and interest types

Capital repayment

Each repayment pays backs some of the capital (amount borrowed) and interest. Providing all repayments are made on time the loan will be settled in full at the end of the term.

Interest only

Repayments are interest only. Providing all are made on time the balance at the end will be the same as it was at the start. Customers need an “exit route” (a source of money that will settle the loan in full).

Fixed rates

The interest rate charged is fixed for a number of years. When the fixed rate ends the customer pays the lenders standard variable rate.

Variable rates

The interest rate charged can vary up or down.

Tracker rates

The interest rate charged is set at a margin above the Bank of England’s base rate. For example if the base rate was 0.5% and the margin 3.5% the customer would pay 4%.

Collateral: The Foundation of Secured Loans

Collateral plays a pivotal role in securing loans by providing a level of assurance and mitigating risk for lenders. When borrowers offer collateral, they provide a valuable asset that serves as a form of security for the lender. The presence of collateral reduces the lender’s risk in case of borrower default or non-payment. If the borrower fails to repay the loan as agreed, the lender has the right to seize and sell the collateral to recover their losses. The value and equity of the collateral help determine the loan amount, interest rate, and terms offered by the lender.

Collateral provides a tangible and enforceable commitment from the borrower, giving lenders confidence in extending credit and enabling them to offer more favourable loan terms, such as lower interest rates and higher loan amounts. For borrowers, collateral serves as a means to access financing that may otherwise be unavailable or obtainable only at less favourable terms. It is essential for borrowers to understand the role of collateral in securing loans to make informed decisions and choose the most suitable loan options for their financial needs.

Types of Collateral

Collateral comes in various forms. This article focuses on loans secured on property or land. However, there are lenders which focus on other types of collateral or security. Often this is seen as more specialist or risky resulting if higher rates and different terms being made available. Here are some common types of collateral:

Real Estate: For most borrowers, properties such as houses, apartments, commercial buildings, or land can serve as collateral. The value of the property and its equity play a crucial role in determining the loan amount and terms. This is a common and well funded sector of the market and so can be very competitively priced

Vehicles: Automobiles, trucks, motorcycles, boats, or other vehicles can be used as collateral. Lenders typically consider the market value and condition of the vehicle to assess its suitability as collateral. Loans are generally over short terms to reflect the depreciating nature of the asset.

Savings Accounts: In some cases, lenders may accept savings accounts or certificates of deposit (CDs) as collateral. These liquid assets provide a level of security for the lender while allowing the borrower to access funds. However they are normally available on the back of an existing relationship with a credit union or bank

Investments: Certain investment assets, such as stocks, bonds, or mutual funds, can be used as collateral. However, lenders may have specific criteria and restrictions regarding the type and value of the investments they accept.

Other Valuable Assets: Collateral can also include valuable possessions like jewellery, artwork, collectibles, or electronics. These items may require appraisal to determine their value and eligibility as collateral. They tend to be very much more expensive and operate like a virtual pawn broker.

Why apply for a secured loan instead of a remortgage?

There are various reasons why borrowers may find a secured loan more attractive. The most common reason clients may want a secured loan to raise finance, is if it provides a better alternative to re-mortgaging i.e. their mortgage has high early repayment charges or they are on a really good rate and don’t want to lose it.

Also lenders in this sector tend to be more flexible and many are prepared to consider non-standard applications such as complex income, adverse credit, older ages & unusual loan purposes.

Sometime remortgaging can mean losing the existing interest rate. This could be because of personal circumstances which affect the lenders risk appetite such as poor credit, higher loan to value, stability of income etc. Therefore, mathematically it can often work out cheaper to keep the existing mortgage rate and borrower extra at a higher secured loan rate. The alternative would be to remortgage the entire amount at a higher rate than the current mortgage. It is the job of your whole of market adviser to work out which is best.

Benefits of Secured Loans compared to unsecured loans

Secured loans offer several significant benefits to borrowers, making them a popular choice for various financial needs. Here are the key advantages of secured loans:

Lower Interest Rates

One of the primary advantages of secured loans is the lower interest rates they typically offer compared to unsecured loans. By providing collateral, borrowers reduce the lender’s risk, making them more willing to extend credit at more favourable interest rates. This can result in substantial savings over the loan’s term, making secured loans an attractive option for borrowers seeking cost-effective financing.

Higher Loan Amounts

Secured loans allow borrowers to access larger loan amounts compared to unsecured loans. The presence of collateral provides a level of security for lenders, enabling them to offer higher credit limits. This is particularly beneficial for significant expenses, such as purchasing a property, financing a business venture, or funding substantial home improvements. The ability to access larger sums of money can help borrowers achieve their goals more effectively.

Longer Repayment Terms

Secured loans often come with more extended repayment periods compared to unsecured loans. This allows borrowers to spread their repayments over a more extended period, resulting in lower monthly payments and improved affordability. The flexibility of longer repayment terms can be particularly advantageous for large-scale projects or investments where cash flow management is crucial.

Easier Approval Process

Secured loans can be more accessible for individuals with less-than-perfect credit or limited credit history. The presence of collateral provides a level of security for the lender, reducing their concern about the borrower’s creditworthiness. Consequently, secured loans may offer a more viable borrowing option for those who may face challenges in obtaining unsecured loans due to credit issues.

Possibility of Credit Improvement

Secured loans provide an opportunity for borrowers to improve or build their credit history. Making timely repayments on a secured loan can positively impact credit scores over time, demonstrating responsible financial behaviour to future lenders. This improved credit standing can open doors to better loan options, lower interest rates, and improved financial opportunities in the future.

Versatile Use of Funds

Secured loans can be used for various purposes, offering borrowers versatility in their financial endeavours. Whether it’s buying a property, financing education, consolidating debts, or making significant purchases, secured loans provide the necessary funds to meet diverse financial needs.

Overall, secured loans offer borrowers lower interest rates, higher loan amounts, longer repayment terms, and more accessible borrowing options. The presence of collateral provides lenders with confidence, enabling them to extend credit at favourable terms. However, it is crucial for borrowers to carefully assess their financial situation, repayment capability, and potential risks before pursuing a secured loan.

Secured Loans – how to apply

Applying for a secured loan requires careful preparation and understanding of the process involved. Advice from a profession adviser is crucial to ensure all options and risks are considered. Here are the key steps an adviser should consider when advising on a secured loan:

Fact Find

• Assess Your Financial Needs: Begin by assessing your financial needs and determining the purpose of the loan. Whether it’s purchasing a property, or funding a business venture, having a clear understanding of your financial goals will help select the most appropriate loan type and amount.
• Your longer term plans: Make sure the product selected doesn’t impact negatively. For example you may plan to sell your home in two years so a five year fixed rate with early repayment charges may not be ideal.
• Other risks: Risks in your circumstances now or in the future need to be considered. Might you have a job change or change in income which could affect your ability to afford the loan.

Sourcing

• Research and comparison: Your adviser should compare lenders lenders from both the the mortgage and secured loan market: Interest rates, fees, other costs and specific types of loan are key considerations. However, factors such as reputation and the lender’s experience in providing secured loans quickly are also considerations. It’s essential to find a lender who aligns with your specific requirements and has a solid track record in the industry.
• Determine Eligibility Requirements: Each lender will have specific eligibility requirements for secured loans. This may include factors such as credit score, income verification, debt-to-income ratio, and the value of the collateral being offered. Your adviser must review the eligibility criteria of potential lenders to ensure you meet their requirements before proceeding with the application.

Quoting

• Indicative terms: Once an adviser has a good understanding of all the points above, and has done some research, you should be given a detailed indication of the likely costs and terms. This should be in writing and accompanied by a telephone call to explain anything you are not sure of.

Applying

• Gather Necessary Documentation: Prepare the necessary documentation required by the lender to process your loan application. This typically includes identification documents, proof of income (such as pay stubs or tax returns), bank statements, and details of the collateral being offered. Be thorough and organised in gathering these documents to expedite the application process.
• Complete the Loan Application: Fill out the loan application form provided by the lender if required. your adviser may have gathered this information at the fact find stage. Either way it is imperative to provide accurate and detailed information regarding your personal, financial, and employment history. This includes details about the collateral you are offering, including its value and ownership documentation. They should double-check the application for any errors or omissions before submitting it.
• Await Loan Approval and Evaluation: Once your application is submitted, the lender will evaluate your eligibility and conduct an assessment of the collateral. This may involve an appraisal or inspection of the property value. The lender will also review your creditworthiness and financial stability. The evaluation process may take some time, so be patient during this stage.

How long does getting a secured loan take?

In theory, once the application has been started, a secured loan can be completed in a few days as the lenders are pretty fast and avoid using solicitors by having inhouse legal teams. Delays occur normally due to third party’s.

Mortgages references

sometime we need your current lenders consent and a report on conduct of your mortgage. However, where consent isn’t needed we can get the information from a credit search

Valuations

If a valuer needs to be instructed this can add days or weeks. However, often we can use an electronic / desktop valuation which is database driven. This can be done same day.

Borrowers

some borrowers give us accurate information and have all the relevant details to send it to us at the start. Other don’t and this is one of the main delays.

Solicitors

In most cases external solicitors are not required. However, where there is a transfer of equity or similar complications, we are reliant on solicitors (usually yours) to work quickly. Typical examples could be using the loan to pay off an ex partner

Advisers and lenders rely on accurate information. If this changes part way through it could mean the advise and the lender has to change. Typically a secured loan will take 2 to 4 weeks to complete. Avoid delays by providing fast and accurate information at the outset.

Offer

• Receive Loan Offer and Review Terms: If your application is approved, the lender will provide you with a loan offer outlining the loan amount, interest rate, repayment terms, and any applicable fees. Carefully review the terms and conditions of the loan, ensuring you understand the repayment schedule, penalties for late payments, and any other contractual obligations.
• Suitability Letter: Your adviser should document in detail the reason why a specific lender or product was selected. This letter will include your goals, risks, circumstances and explain why the chosen loan meets you needs. The letter will be detailed and should be read carefully in conjunction with the lenders offer letter. Ask questions on anything which is not 100% clear.

Completion

Accept the Loan and Arrange Funds Transfer

If you are satisfied with the loan offer and its terms, formally accept the loan offer. Discuss any remaining matters with your broker. You are not committed yet and can back out or change the terms of the offer subject to meeting the lenders requirements.

Legal completion

Unlike a mortgage, in most cases secured loan lenders have internal legal departments and complete the loan in days – often the same day as receiving your acceptance.

Repay the Loan as Agreed

Once the loan is disbursed, adhere to the agreed-upon repayment schedule. Make timely payments to avoid any penalties or negative impacts on your credit. Maintain open communication with the lender in case of any financial difficulties or changes in circumstances that may affect your ability to repay the loan.

Applying for a secured loan requires careful consideration and attention to detail. By following these steps and being well-prepared throughout the process, you can increase your chances of securing a loan that meets your financial needs while responsibly managing your debt obligations.

You can apply via your adviser / broker or directly to Promise. Most secured loans are sold on an “advised” basis meaning customers receive advice on the suitability of the loan offered. Our process is:

Adviser gathers in the customer’s requirements and circumstances by carrying out a “fact find”. This paints a detailed picture of what is required.

We find a suitable loan from our panel of lenders offering over 2250 products.

We communicate this by phone and issue a “suitability report” in writing detailing why we regard the loan as suitable and how it meets the customer’s aims and objectives.

Customers complete the application forms and send to us with the supporting evidence needed. On average it takes between 2 and 6 weeks for completion.

How long should I borrow for?

Firstly, don’t worry too much – your adviser will guide you. They need to calculate the realistic amount that you are able to repay taking into consideration all factors. You don’t want to spread the repayments over a short period if this risks you not being able to maintain all your commitments. Similarly, Is not a good idea to extend the repayment term unnecessarily as this means you will be paying interest for longer and therefore the cost of credit is higher. In other words, careful planning with your adviser is vital!

Secured loans with fixed and variable rates

Both fixed and variable rates are available from most lenders. Where rates are expected to drop in the future, fixed rates are generally lower than variable. The decision on which type of rate to opt for is often a personal one based on your circumstances. Nobody has a crystal ball to tell you what will happen to rates in the future.

Interestingly, taking a 5-year fixed rate can help you borrow more. This applies where affordability may be an issue. When taking a 5-year fixed rate lenders apply different calculations which increase the service ability of the loan. This in turn can allow you to borrow more.

Common uses of secured loans

Secured loans for debt consolidation

One of the most common uses of secured loans is for debt consolidation. One of the reasons is that mortgage lenders don’t cater well for debt consolidation. Secured loans have been used for debt consolidation for over 40 years and the lenders are very accommodating.

You may have heard the phrase” Consolidate your debts into one convenient monthly payment”. There are benefits and risks to consider when consolidating your credit using a secured loan. Please see our separate page and video guides on secured loans for debt consolidation.

Secured loans for self-employed borrowers

Secured loans are particularly good for self-employed borrowers. Loans are available for those who have only been self-employed for one year. However the real benefit comes when comparing a secured loan with a remortgage.

For someone who has been self-employed for a short time or who doesn’t have great accounts, they might not be eligible to a mainstream mortgage lender. Therefore, when raising capital or remortgaging, it could mean changing lenders and borrowing their entire remortgage at a much higher rate. Using a secured loan instead, Borrowers can keep their existing mortgage (usually at a lower rate) and only pay the higher rate on the extra borrowing.

Working out which is best is the job of an advisor. Check out our separate page and video guide on secured loans for self employed.

Secured loans for Home Improvements

Home Improvements are another common use of a secured loan. The scale of the proposed home improvements could dictate which is the best product for you. This could include an unsecured loan or even bridging finance. There are many considerations and you can find out more on our specific page with video tutorials on secured loans for home improvements

What does the rate depend on?

The interest rate varies by lender and depends on factors including your credit score, credit history, equity, income, stability, property, loan amount and much more.

As rates change and the underwriting is so complex, there is little point trying to second guess what you will be offered. However, here are some pointers to getting the best rates:

• Credit Score – The higher the better
• Equity – The lower the loan to value the better
• Affordability – if you can easily afford the repayments with cash to spare, more lenders will be available.
• Stability – A good stable job / income is better than applying when you have just changed jobs
• Property – a standard residential property in good condition is more attractive than anything quirky.

Considerations and Risks

Before applying for a secured loan, it’s crucial to understand the considerations and risks involved. Here are key factors to keep in mind:

Repayment Obligations

Consider your ability to meet the repayment obligations of the loan. Failing to make timely payments can result in penalties, damage your credit score, and put your home at risk of repossession. Assess your financial stability and ensure that you have a realistic repayment plan in place.

Property valuation and condition

The lender will assess its value and condition to determine its suitability as security. In some cases, the value assigned by the lender may differ from your own assessment. Be prepared for potential discrepancies and ensure that the collateral adequately secures the loan amount you need.

Risk of Collateral Loss

Remember that with a secured loan or mortgage, the property is at risk of being repossessed if you default on the loan.

Interest Rates and Costs

Take into account the interest rates and costs associated with the loan. While secured loans generally offer lower interest rates compared to unsecured loans, they can still vary among lenders. Factor in any additional fees, such as lender / broker fees or valuation costs, when assessing the overall cost of the loan.

Long-Term Commitment

Understand that secured loans often come with longer repayment terms. While this can provide flexibility in managing monthly payments, it also means committing to the loan for an extended period. Consider the impact of a long-term financial obligation on your future financial plans and goals.

Credit Impact

Recognise the impact on your credit history. Defaulting on a secured loan can severely damage your credit score and make it challenging to obtain credit in the future. Conversely, making timely payments can improve your creditworthiness and open doors to better borrowing opportunities. Ensure that you are prepared to manage the loan responsibly to protect your credit standing.

Alternative Financing Options

Consider alternative financing options, such as unsecured loans or lines of credit, if the risks associated with secured loans outweigh the benefits for your specific circumstances. Unsecured loans do not require collateral but may have higher interest rates or stricter eligibility criteria.

By carefully considering these factors and weighing the potential risks, you can make an informed decision about whether a secured loan aligns with your financial goals and risk tolerance. It’s important to seek professional advice to access all options and ensure that the loan suits your needs and financial capabilities.

Secured Loans vs. Unsecured Loans

Unsecured loans and secured loans are two distinct types of borrowing options with significant differences in terms of collateral requirements, interest rates, and risk profiles.

Secured loans are backed by collateral, normally your property. The collateral acts as security for the lender, reducing their risk in case of default. Due to the presence of collateral, secured loans generally offer lower interest rates compared to unsecured loans. Additionally, secured loans often allow borrowers to access higher loan amounts and longer repayment terms. However, the borrower assumes the risk of losing the collateral if they fail to repay the loan as agreed.

On the other hand, unsecured loans do not require collateral. Lenders extend credit based solely on the borrower’s creditworthiness, income, and other financial factors. Since there is no collateral involved, unsecured loans typically have higher interest rates to compensate for the higher risk taken on by the lender. The loan amounts for unsecured loans are usually smaller, and the repayment terms are shorter. Borrowers with excellent credit history and stable income are more likely to qualify for unsecured loans.

The choice between a secured loan and an unsecured loan depends on various factors such as the borrower’s financial situation, credit history, borrowing needs, and risk tolerance. Secured loans are suitable for individuals who have valuable collateral and are seeking larger loan amounts with lower interest rates. Unsecured loans, on the other hand, may be more appropriate for borrowers who lack collateral or prefer not to risk their assets. Understanding the differences between secured and unsecured loans allows borrowers to make informed decisions based on their unique financial circumstances and borrowing requirements.

Frequently Asked Questions about Secured Loans (FAQs)

What is a secured loan?

A secured loan is a type of loan that requires collateral, such as a property to secure the loan. The collateral serves as a form of security for the lender, reducing their risk in case of borrower default.

What are the benefits of a secured loan?

Secured loans offer several benefits. These include lower interest rates, higher loan amounts, longer repayment terms, and easier approval for borrowers with less-than-perfect credit. The presence of collateral provides lenders with confidence, enabling them to offer more favourable terms.

What can I use as collateral for a secured loan?

Collateral for a secured loan can vary depending on the lender and the loan type. Common forms of collateral include real estate properties, vehicles, savings accounts, investments, or valuable assets. In this article we are referring to residential property.

How does the collateral valuation process work?

The collateral valuation process involves assessing the value and condition of the collateral to determine its eligibility for securing the loan. Lenders may employ independent valuers or conduct their own evaluations based on data base valuations or external appraisals

What happens if I default on a secured loan?

If you default on a secured loan and fail to make payments as agreed. The lender has the right to seize the collateral and sell it to recover their losses. However it also has a duty to treat you fairly and would have to get court permission to repossess your property. If you hit financial problems talk to your lender and find an acceptable compromise. It is more difficult for a lender to get repossession where a borrower is trying their best and needs some time. If you ignore the lender and are unreasonable they getting permission to repossess is made easier.

Can I get a secured loan with bad credit?

Having bad credit may make it more challenging to obtain a secured loan. However, there are many lenders specifically catering for different levels of bad credit secured loans. In some cases serious recent arrears or CCJ’s can be accepted.

Are secured loans only for purchasing or improving property?

No, secured loans can be used for virtually any legal and ethical purpose. This includes home improvements, debt consolidation, funding a business venture, weddings, school fees or other significant expenses.

Are there alternatives to secured loans?

Yes, alternatives to secured loans include unsecured loans, personal lines of credit, or credit cards. Unsecured loans do not require collateral but may have higher interest rates and stricter eligibility criteria.

How do I choose the right secured loan for my needs?

Don’t – use a broker who knows all the lenders and can advise you on the best loan or remortgage for you. Remember, when securing money against your property a loan or a remortgage could be appropriate. While the answers provided here offer general information. It’s always recommended to consult with financial professionals to get specific details and advice tailored to your individual situation.

Conclusion

In conclusion, making informed financial decisions is of paramount importance when considering secured loans. Understanding the benefits and considerations associated with secured loans empowers borrowers to make choices that align with their financial goals and circumstances.

Secured loans offer a range of advantages, including lower interest rates, higher loan amounts, longer repayment terms, and improved chances of approval. These loans provide opportunities to access substantial funds for various purposes. Whether it’s purchasing a property, funding home improvements, or expanding a business. However, it’s crucial to carefully evaluate the risks involved. Such as the potential loss of collateral in case of default or market fluctuations affecting the property’s value.

By weighing the benefits and considerations, borrowers can determine if a secured loan is the right option for their needs. It is advisable to seek professional advice and guidance to ensure a well-informed decision.

Remember, each individual’s financial situation is unique, and it is important to consider personal circumstances and goals when determining the most suitable borrowing option. By making informed choices and taking proactive steps to understand the intricacies of secured loans. Individuals can make sound financial decisions that contribute to their long-term financial well-being.

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