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Secured Loans lending of last resort

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Borrowing secured on your home to pay off standard debts is rightly seen as an evil beast yet, as a property owner's loan of last resort, in specific limited circumstances secured loans can be an acceptable solution. This is a taboo subject, and I've railed against secured loans many times, but they are commonly used, so it's important to ensure it's done the best way.

WARNING:

This article is substantially out of date and here for archive purposes only. The secured loan market may have changed substantially since it was written. We do plan to update it – but as other guides are higher priority it may take some time.

What is a secured loan?

Simply put, they are a loan only available to property owners (or mortgage holders), where the lender can forcibly sell your house to get its money back if you can't repay. The 'secured' bit means the lender gets 'security' not you, as if there are problems, it can repossess your home.

When we normally talk about personal loans from a bank or building society, these are unsecured, which means there's no automatic link to your home (so non-homeowners can borrow this way too).

Sadly it is becoming more common that for those in financial difficulty even unsecured lenders can get what's called a 'charging order' on your home. This effectively means they have a call on the money from the sale of your house.

This doesn’t automatically mean it can push repossession though, there’s another court stage they’d need to go for and the courts are much more reticient to grant it on charging orders. Yet even with this, it's much more difficult for lenders to take your home if its unsecured.

The Important Rule of Thumb



If everything else is equal, an unsecured loan is always preferable to a secured one.

Why would anyone want a secured loan?

  • Easier to obtain. Unsecured loans are almost always cheaper for those with decent credit scores, but secured loans provide lenders with, well… security, so they're more willing to lend to poor credit scorers.

  • Big borrowing is possible. The maximum unsecured loan is £25,000 yet secured loans can be £75,000.

  • Borrowing over a longer period. Secured lenders prefer loans to last longer to help offset hefty set-up costs, usually from five to 20 years. Unsecured lending is usually one to seven years. Borrowing for longer does reduce the monthly repayments, but substantially increases the total interest repaid.

£10,000 loan at 10%

Length
Monthly Repayment
Total Repayment
Total Interest Cost
5 years £212 £12,720£2,720
10 years £132£15,840£5,840
20 years £96£23,040£13,040

Contrary to glossy TV ads secured loans aren't an easy option for those with heavy debts. A home isn't something to gamble with. These are purely loans of last resort. The only good reason for using them is to cut existing debt costs. Those considering secured loans for new borrowing or purchases should simply not do it.


Checklist before considering a secured loan

  • Credit Card Balance Transfers. Credit cards are ‘unsecured' and, used correctly, the cheapest borrowing possible, especially when shifting debt to new Balance Transfer offers. Also read Cheap Credit Card Loans.

  • Unsecured Loans: Cheaper and less risky for those who can get them. Full details: Cheap Personal Loans.

  • Check Credit Reference Files: Those rejected from unsecured lending without an obviously poor credit history should check their information held by the credit reference agencies Equifax, Experian and CallCredit isn't erroneous. Full details: Your Credit Rating.

  • Use savings: The interest paid on savings is usually far less than interest charged on borrowing, so paying off debts with savings makes sense. Traditional logic does say always have an ‘emergency cash fund'. I disagree. After paying off debts, don't cut the credit cards up, lock them away strictly in case of a substantial emergency. If no emergency happens you're quids in, and can then start a cash emergency fund. If it does, use the cards and you're no worse off than when you started, and you've saved substantial interest costs in the meantime. Full details: Pay Off Your Debts With Savings.

  • Credit Card Shuffle: It's possible to cut the interest rate on existing debts even without getting new products. Many credit cards allow existing customers to move other debts to them at special rates. Correctly shifting balances and prioritising repaying expensive debts first creates substantial savings. Full details: Credit Card Shuffle.

  • Budget & Reduce Outgoings: Massive MoneySaving is possible on everyday spending by moving to better products. See the Money Makeover and The Money Diet for ideas. Budget effectively to allow quicker and easier debt repayments with the Budget Planner.

  • Remortgage: Mortgages are simply a special type of secured loan with cheaper rates. Borrowing the money on your existing mortgage, or remortgaging to a new cheaper deal is a valid option, but isn't always correct. Mortgage debts are paid off over a long time, and 5% over 20 years is more expensive than 10% over five years. Plus you may be forced to increase your life assurance and other associated costs if mortgage debts increase. Those without flexible mortgages (which allow quick repayments) may sometimes be better off with a secured loan. Full details: Find the Best Mortgage, Remortgage Guide.

  • Debt Counselling: For those consistently struggling with debts and meeting repayments, free personal help is invaluable. Do it as quickly as possible, the longer you leave it the worse it gets. Avoid commercial debt management companies.

    A number of completely free, charity-based or publicly-funded bodies offer a fantastic service: StepChange Debt Charity (formerly CCCS), National Debtline, Citizens Advice Bureau and the Community Legal Advice and if you are considering taking out an IVA please read my full IVA Guide first to check if it's right for you.


Getting a secured loan cheaply and safely

How much to borrow?

Get a handle on your existing debts first; list them on a piece of paper. Once you know the secured loan rate, draw a line across the page where this fits in. The secured loan should only be considered to pay off the more expensive debts above the line.

Don't feel all debts should be consolidated into one. This is a common secured loan sales pitch, yet in isolation it serves no real purpose. Remember, if you're repaying a higher rate or for longer, they make more cash.

You're converting a fixed rate into variable rate debt

While most unsecured loan interest is fixed for the life of the loan, secured loan rates are usually variable and can shift both with UK base rates and for the lenders' own reasons – check the terms.

If you're considering converting fixed rate debt such as a standard personal loan into variable rate debt, always ask “could I afford the repayments if rates increased?”. If not, don't do it. Don't throw surety away. Some secured loans offer rate fixes, but usually only for a limited period; and do always check there are no penalties for paying off your existing debts early, something common with unsecured loans.

Finally, don't borrow more than you need. Disgustingly some lenders tout, “why not borrow a little more for a holiday? You deserve it.” Don't do it. Never treat secured loans lightly, take as little lending as possible.

And most importantly if you think you won't be able to make the repayments, don't even start down this route, it isn't worth it - see the free debt cousellors instead.

How long to borrow for?

Budget to work out the maximum realistic amount you can commit to repaying, use the Budget Planner to help. Don't underestimate or it'll take longer to repay, costing more interest; and don't overestimate or you may overstretch yourself, risking your home. Careful planning is crucial.


How much does it cost?

What the rate depends on.

The interest rate offered depends on the loan size, length, your ‘credit score' and the ‘free equity' in your home. Lenders assess these factors in different ways. One may be cheapest for good credit scorers with limited equity but uncompetitive for poor credit scorers with high equity.

Your credit score depends on a range of factors, mentioned in the Your Credit Rating article, but the most important are income and outstanding debts, arrears (being behind in repayments), defaults (failing to make repayments), County Court Judgements or CCJs (where repayment failures have been taken to court) or bankruptcy (a legal judgement relieving a person of all past debt commitments).

‘Free equity' is the difference between a property's value, and the amount owed on it. The bigger the difference, the better rate you'll be offered. Sadly recent house price falls mean many people can now have low ‘free equity' in their homes.

Comparing the price.

All costs should be paid by the lender and included in the interest rate (APR), including the initial valuation and legal fees.

The exception is Payment Protection Insurance (PPI), which covers repayments in the event of accident, sickness and unemployment (often for a limited time). Lenders' interest rates don't include the cost of the insurance and providers often make a bundle on PPI. Those who want PPI should compare based on the total cost (total monthly repayment times the loan length in months) not the APR.


Finding the best deal

Ask your existing mortgage lender.

Many offer special terms for those with good mortgage repayment records. It won't always be cheapest, but it's a good benchmark for comparing others against.

Internet price comparisons.

There are a number of free secured loan price comparison websites. Enter loan, credit and home details and they'll publish the cheapest lenders. The easiest to use is MoneySupermarket*. It gets paid a lead fee if you then click through to a lender. Be careful, though, that the quote does not include PPI insurance.

Non-Internet Users.

Finding the best deal is a substantial undertaking, which using the web makes easier and quicker. If possible, find someone web-savvy and ask them to access the sites above to get the general prices, then call up the cheapest providers directly. (If you're wondering why I've included ‘non-net' options here, well you may just be that web-savvy friend helping someone else!)

Failing that, for a typical 6 year £15,000 loan to a homeowner, in Oct 08 Moneysupermarket is currently listing:

  • Good or fair credit profile: Winner: platinumsecuredloans.co.uk at 7.5% then Magic Loans and Ocean Finance

  • Poor credit profile : Winner: Igroup at 12.5% then Ocean Finance and Accepted Plan

Those with poor credit scores or little free equity mightn't be able to find a secured loan cheaper than existing debts. If you're struggling, again I'd point towards the free debt counselling services (see above).

Repaying early?

This can be costly. Secured loans are not flexible and overpaying to clear the debt quicker usually isn't allowed, it's why working out affordable payments is key. If you come into some money and can pay off the whole loan, you should only pay interest for the loan up to that date, not the original loan period – lenders present this as a virtue, it isn't, it's a minimum expectation. However, there are early repayment penalties, so if it's a plausible scenario, examine the following carefully:

  • Redemption penalties: These are fines if you try and pay off the loan early. This used to be a major problem as these penalties are stringent, and for many with existing secured loans sadly they're still in force.

    Yet for new loans of less than £25k, redemption penalties are legally restricted to only two months' worth of interest. Larger amounts have no maximum limit however, and penalties can be much heftier. Many loans have settlement figures of up to 6 months interest for the first few years, then on a sliding scale after this.

  • Rule of 78: For loans of under £25,000 a potential hidden penalty used to come from ‘rule of 78' interest calculations, a complicated formula which artificially allocates repayments towards interest not capital, leaving more left to repay than you think. Repay very soon after borrowing and it can mean paying back more than you borrowed. Find out more: Rule of 78.

    Thankfully people taking out loans these days don't have to worry as the government has banned rule of 78 charges, however most people with loans taken out before that will be caught by this.


Someone with £15,000 debts averaging 17% and repaying £300 a month would take 6 years, 9 months to repay. Assuming one CCJ, so standard new credit isn't available, just calling any advertised secured lender you could pay 16.9%.

However, using price comparison services, it's possible to find a 9.9% secured loan over 6 years, reducing the monthly repayments and paying the debt off more quickly, with total interest costing only £4,700, less than half the cost.

£15,000 credit card debit for someone with one CCJ

Rate Repayment Time Taken to Repay Total Interest Saving
Credit Cards 17%*£3006 years 9 months £9,500-
Expensive Secured Loans (1) 16.9%*£3206 years£8,300£800
Cheapest Secured Loan (1) 9.9% £270 6 years £4,700 £4,800
*assumes rate stays fixed. (1) thirty year old man with a reasonable equity in home

The Worst That Could happen?

You can lose your home! However, thankfully, it is less profitable for most legit secured loan lenders to repossess homes than have the debt repaid. If you mightn't be able to make a payment, or you get behind with repayments notify the lender immediately. It maybe possible to renegotiate the repayment schedule with them.

Failure to repay has an immediate negative impact on your credit score, plus lenders' letters informing of arrears are often charged for, added to your account with interest, effectively a missed repayment penalty. At this point again consider talking to the free debt counselling agencies.

If all fails, the lender will repossess your house, petitioning the court to demonstrate you've been unreasonable; refused to sign letters or pay your newer repayment schedule. After that it'll empty the property of you, your family and your possessions, sell the property (probably at a low price for a quick sale) take what it's owed and its costs and give you the leftovers (if any).

Glossary

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