They can be a nightmare - here's how to avoid them
Secured loan providers encourage you to consolidate your debts, tempting you with the promise of "one manageable monthly payment". Yet secured loans are expensive, and come with the risk of losing your home. In short, they're a financial nightmare and best avoided. That's why we've focused this guide on helping you find cheaper alternatives. Yet, if a secured loan is your chosen option, we tell you how to find the cheapest.
1-min read on alternatives to a secured loan
As our intro suggests, we don't like secured loans. If you're thinking of getting one, always try these alternatives first...
- If you're struggling with existing debts, get help from a debt advice agency or see if you can get a personal loan - they're much cheaper and less risky.
- If you're wanting to borrow more, only ever even consider taking out a secured loan to do so if it's for home improvements or something else that'll add value to your home. If so, it's usually cheaper to remortgage to free up cash - a mortgage broker can talk you through your options.
If what you're borrowing for won't add value to your home, NEVER secure the borrowing on your home. Instead, see if you can get a personal loan.
If you want to know more about secured loans, why we don't like them and other alternatives, read on...
What is a secured loan?
A secured loan is where you put up some kind of security - such as your home - when taking out the loan. This is why they're often known as homeowner loans - if you don't have a home to put up as security to back the loan, you won't be eligible to get one.
Security can sound good, but...
Secured loans give the lender security, not you. It's far, far, better to take a normal unsecured personal loan than one secured on your home.
The most important thing to know is that if you don't or can't pay the loan back on time, the lender can apply for a court order to sell your home to get back any money it's owed.
Taking out a secured loan is rarely a good move, and should be considered lending of last resort. They're only useful in very limited circumstances and those with reasonable credit scores should consider a personal loan, cheap credit card deals or even extending their mortgage instead - our alternatives section has more on when you should consider each of these.
Why would anyone want a secured loan?
As you've probably gathered from the start of this guide, we don't think anyone should want one of these loans, and we certainly don't think anyone should get one. However, people do get them because:
They're easier to get. 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.
Bigger borrowing is possible. The maximum unsecured loan is £50,000 (or £25,000 with some providers) yet secured loans can be £100,000 or higher (the amount you can borrow depends on what proportion of your home you own, and how much your home is worth).
- You can borrow over a longer period. Secured lenders prefer loans to last longer to help offset hefty set-up costs, usually from five to 20 years. This means they can offer low monthly payments - especially tempting for those already struggling with loan and credit card repayments. But...
Don't get sucked in by claims of "manageable payments". Consolidating can reduce monthly repayments but it does this by making you borrow for longer, which can substantially increase the total interest repaid.
The table illustrates this clearly...
As you can see, the longer the loan is, the less the monthly repayment. However, borrowing for longer allows a lot more interest to rack up. This is why, 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.
Secured loans vs unsecured loans - the main differences
Most high street personal loans are 'un-secured'. Annoyingly, that sounds like a bad thing, but it isn't. The alternative, and the kind you more often see advertised on TV as consolidation loans, are 'secured loans'. Here's how they compare:
|Your home's safe if you can't make repayments||(1)|
|Rates are fixed so you know what you'll pay each month||
(rates are often variable)
|Terms are commonly 5yrs or less (2)|
As the table shows, cheap personal loans are the better option - though be aware they are still debt. Fail to repay a personal loan and you'll still have a missed payment on your credit report, which will impact your ability to get credit in future. However, we do prefer them as the risk to your home is minimal.
Alternatives to try before taking out a secured loan
As you'll have gathered by now, we don't think anyone should be getting a secured loan. As such, we've developed a list of other ways you may be able to get cash or cut the cost of your existing debts. We've split the checklist up depending on whether you're:
Before you decide a secured loan is the right option (because it probably isn't), try the following:
- Using any 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'. We disagree.
After paying off debts, don't cut the credit cards you've just paid off 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.
- Doing a balance transfer. If you have credit cards, you may be able to cut the cost of that debt by transferring your debt to a new card which charges 0% interest. Read the full Balance Transfer Credit Card guide to find out how.
- The 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.
- Unsecured loans. As we said above, these are cheaper and less risky for those who can get them. You can use them in the same way you would a secured loan to pay off other credit. Full details: Cheap Personal Loans. Paying off another loan? See Cut Existing Loan Costs.
In debt crisis? Don't borrow - instead seek free debt help
The options above can help, but they're not right for everyone. We have three questions that are worth asking about your debts...
- Do you struggle to meet minimum monthly payments?
- Does your total debt (excl mortgage and student loan) exceed a year's salary?
- Do you have sleepless nights or depression/anxiety over debt?
If you've said yes to any of these, don't borrow more (and especially not on a secured loan) - instead get free, one-to-one debt counselling help from Citizens Advice, StepChange or National Debtline. And if you need emotional support, try CAP.
They're there to help, not judge. The most common thing we hear after is: "I finally got a good night's sleep." Read inspiring stories in our Debt-Free Wannabe forum and see our Mental Health & Debt and Debt Crisis Help guides.
A secured loan is NEVER the right option here. Instead:
Budget & reduce outgoings. Massive savings are possible on everyday spending. Do a Money Makeover to free up existing spending, then budget effectively with the Budget Planner. Use any income freed up instead of borrowing.
- See if you can get a personal loan. As we said above, these are cheaper and less risky for those who can get them. You can use them in the same way you would a secured loan for additional borrowing, though it's worth noting that you can usually only borrow up to £25,000 on an unsecured loan. Full details: Cheap Personal Loans.
- Remortgage. Only consider this if the reason you're borrowing more is to improve your home eg an extension or a new kitchen. If it is, then borrowing the money on your existing mortgage, or remortgaging to a new cheaper deal, is a valid option, as rates are usually much cheaper than those on secured loans. Read the Remortgage Guide or talk to a mortgage broker.
If you're borrowing for any other reason, DON'T secure the borrowing on your home - whether on a mortgage or a secured loan.
Compare secured loans to find the cheapest deals
If you've made your way to this part of the guide, we'll make one last plea for you to consider the other options:
- If you're struggling with existing debts, get help from a debt advice agency or see if you can get a personal loan - as we've said, they're cheaper and much less risky.
- If you're wanting to borrow more for home improvements, talk to your mortgage lender (or a mortgage broker) to see if you can borrow more.
If you are determined to get a secured loan, then only do it to consolidate debt and only if it means you're paying less for your debt (those considering secured loans for new borrowing or purchases should simply not do it).
The key aim is to cut the interest costs of your debt, whether that's on one loan or 22 of them, and pay it off as quickly as possible. There are a few steps to follow...
- Get a handle on your existing debts first - list them on a document or piece of paper.
- Find out the rate you can get on a secured loan.
- Only use the secured loan to pay off debts that have a higher interest than the one on your secured loan.
- Borrow the minimum amount needed and pay it off as quickly as you can (be mindful of whether the loan has early repayment charges).
It's worth knowing that when you're looking for a secured loan, you almost always need to speak to a broker who will look to match you with a lender who can help you. Here is our list of sites to try (and what each is useful for):
- Uswitch – this comparison site gives you a quick idea of headline secured loan rates.
- MoneySupermarket - this comparison site lets you check if you're likely to get a loan before you apply.
- Fluent Money - if you want to go direct to a broker to find out your options (Fluent Money is the broker you'll speak to if you apply through either of the sites above).
Want to complain about your secured loan provider?
If your loan provider has taken the wrong amount in payment or its service has been atrocious, then you don't have to suffer in silence. It's always worth trying to call the lender first to see if it can help, but if not...
Secured loans FAQ
You can, but there are often "early repayment charges" associated with doing so.
For loans of less than £25,000, early repayment charges are legally restricted to only two months' worth of interest.
Yet larger amounts have no maximum limit, 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.
Essentially, the info and documentation you need to get a secured loan is similar to what you need to get a mortgage. At a minimum you'll need:
- Identification documents
- Proof of address
- Payslips (or SA302s if self employed)
You may also be asked for a few months' bank statements so the lender can check your expenditure to prove the loan is affordable.
In addition, the lender will also check your credit report to ensure that you're a good risk to lend to and likely to repay. Our Credit Scores guide has more on what lenders are looking for.
They can sometimes be easier to get than personal loans, simply because you're putting up your home or business as security for the loan.
However, as we've said, if you don't repay, you can lose your home, so it's always better to get a personal loan if you can.
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 so it's more manageable for you.
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, 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).
It could, if you manage it correctly - though as we've said, personal loans tend to be cheaper and much less risky so should always be your first port of call if you're getting a loan to pay off other debts.
Secured loans are not always easy to compare, as they can have variable rates for some or all of their term. These variable rates often shift both with UK base rates and for the lenders' own reasons - check the terms to see if and how your rate could vary.
The rate you're looking out for is the APRC. This stands for "Annual Percentage Rate for Comparison" and it is a rate that encompasses both the interest you'll pay and all the lender's fees (eg broker fees, valuation fees & legal fees).
Here's how much of a difference different APRCs can make to the cost of borrowing on an example £18,000 loan... and how that loan compares to paying credit card interest on the same amount...
Credit cards at 21% £400 6 years, 9 months £13,950 £0 Secured loan at 13.2% £330 6 years £8,160 £5,790 Secured loan at 7.9% £280 6 years £4,650 £9,300
As you can see from the table, secured loans can cut your cost of borrowing quite significantly. Yet, it's always worth checking whether you can get an unsecured loan first....
Get an unsecured loan at 3% for £18,000 over six years and you'd pay just £1,670 in interest and fees - a saving of more than £12,000 over the credit card, and a saving of £3,000 over the cheapest secured loan.
If you've decided a secured loan is right for you, you need to know how much you could end up repaying. How much a secured loan could cost you depends on the interest rate you get. Your interest rate can vary depending on:
- How much you're borrowing. Never borrow more than you need. Borrow as little as possible, and pay it off as quickly as possible.
- How long you're borrowing for. Try to minimise the number of years you're borrowing for. While longer loans have smaller monthly repayments, you'll actually pay more overall as you'll be charged more interest.
Work out the maximum realistic amount you can commit to repaying each month (the Budget Planner can 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.
- Your credit history. This is how well (or badly) you've managed credit in the past. If you've a long history of payments made on time and in full, you'll likely get a lower interest rate than someone who's missed payments in the past. See how to check your credit reports to find out how lenders might see you.
- How much equity you currently have in your home. This is the difference between your property's value and the amount you owe on your mortgage.
In general, the cheapest secured loan rates are from 4% APR, for longer, larger loans. Yet it's not uncommon to see rates of 8% to 13% (and even higher if you have poor credit). Always make sure you compare costs and find the cheapest loan you can get.
- How much you're borrowing. Never borrow more than you need. Borrow as little as possible, and pay it off as quickly as possible.
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