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What is a secured loan?

What is a secured loan?

Category: Loans

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Loans can be tricky things to understand, particularly if you're after a significant sum of money. Typically, those seeking smaller amounts would choose an unsecured personal loan, but if you're in need of £25,000 or more, you'll need to take it one step further to offer some kind of security. Given the regulation changes that are occurring in this market at present, we thought we'd take the opportunity to look at what a secured loan actually is.

Secured (or second charge) overview

In a nutshell, a secured loan – otherwise known as a second charge mortgage – allows you to borrow a sum of money that's secured against a property. They're called second charge mortgages for a reason, namely that they're treated exactly the same as regular mortgages in terms of the rules that lenders have to adhere to, not to mention the ultimate threat of repossession should you fail to keep up with repayments.

Here's a quick checklist of what a secured loan (or second charge mortgage) entails:

  • These loans are for existing mortgage holders who are seeking to borrow larger amounts of money than the norm (up to £100,000+), as long as it's only for purposes that are legal and not subject to commercial gain.
  • Loan terms typically last between three and 25 years.
  • Borrowers will normally be required to have built up equity in their property that they can use as security against the loan.
  • The property will be secured by way of a "second charge" – this mortgage will sit behind your main mortgage (which is lent on a "first charge" basis), and becomes a legal arrangement that's registered with the Land Registry.
  • As with a regular loan or mortgage, you must make regular repayments throughout the term of the loan.
  • Defaulting on your second charge repayments means that the lender can file for repossession of your property.

Secured loan vs. personal (or unsecured) loan

The key difference between the two, beside the amounts that are available to lend, is the level of security involved. Unsecured personal loans by their very nature have nothing secured against them, which is why lenders will only offer smaller amounts to those with squeaky clean credit histories. The interest rate, and their trust in the applicant, becomes the security – there's less risk to the borrower but more for the lender, and if you default on your repayments, you'll be left with a poor credit rating and will find it difficult to access credit in the future.

Conversely, secured loans are a lot riskier for the borrower as there's the chance that their home can be repossessed. Lenders tend to require some form of security for larger loan amounts, hence the secured nature of the loan – they know that, one way or another, they'll get their money back in the end.

However, second charge loans have recently become regulated by the Financial Conduct Authority, which means they're subject to exactly the same rules as regular mortgages – you'll need to be able to demonstrate that you can afford to repay both the first and second mortgages, with room to spare. This, essentially, offers another layer of protection for the borrower, as strict affordability checks mean there's less chance of you being unable to repay the loan.

Which is right for me?

The answer will often come down to how much you want to borrow, and crucially, whether or not you're a mortgage holder. If you're seeking a loan of more than £25,000 you'll usually have to own your own home to be able to offer the necessary security to the lender, but if you're seeking smaller amounts, a personal loan will often be preferable.

Check out our personal loan calculator to see the kind of loans available and what your repayments could be like, or if you need a more substantial sum of money, compare secured loans with our partner Loans Warehouse.

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.