Secured loans require borrowers to pledge some security, such as the home in which they live, to lenders and, as such, are sometimes referred to as homeowner loans. In the event that a borrower is unable to repay the loan, the lender can forcibly sell the home to recover the money borrowed and the interest accrued. Secured loans are typically easier to obtain than their unsecured counterparts, especially for borrowers with poor credit scores, and they offer the possibility of borrowing more money over a longer period.
The fact that lenders are taking less of a risk with homeowner loans means they may offer a lower interest rate, but borrowers need to satisfy some standard criteria in order to qualify for this type of loan. Obviously, to qualify for a homeowner loan, you need to own your home outright or with a mortgage. You need to be aged 18 years, or older in some cases, a UK resident and able to make monthly repayments by direct debit. Other typical criteria for homeowner loans include a stable, verifiable employment history and a debt-to-income ratio that is low enough to allow the borrower to comfortably repay the loan. Self-employed borrowers may qualify for a homeowner loan, but they will generally be required to provide proof of income for the last six months or so.
Secured loan lenders typically offer loans between £1,500 and £250,000 and while they may well undertake credit checks, they are unlikely to base their lending decision entirely on how well you have handled credit in the past. The equity you have in your property, or in other words, its market value above and beyond what you owe on it in terms of a mortgage or other loan, is likely to be their major concern. But even if its value is less than the outstanding mortgage — a situation known as ‘negative equity’ — you may still qualify for a secured loan if you satisfy all the other criteria. Generally speaking, if the equity in your property is equal to or greater than the amount you borrow with a secured loan, lenders will pay less attention to your debt-to-income ratio than might otherwise be the case.
Whether or not you’re offered a loan in the first place, and the interest rate you’re offered if you are, depends on the size and duration of the loan, your credit score and the equity you have in your property. Bear in mind, though, that lenders assess these factors in different ways, so if you’re turned down for a loan with one lender, it doesn’t mean that you’ll necessarily be turned down by every lender. An example of such a lender is Evolution Money, with bespoke secured loans for a variety of needs.
Any secured loan comes with the legal warning — ‘your home is at risk if you do not keep up repayments on a mortgage or other loan secured on it’. Any ‘security’ is afforded to the lender, not the borrower. As such, a secured loan may be suitable for reducing the cost of existing debt, but less so for new borrowing and purchases. If you do decide to follow the secured loan route, check the terms and conditions with regard to the initial interest rate and any subsequent changes to it. The interest rate charged on a secured loan is usually tied to the Bank Rate or the standard variable rate of the lender concerned, so make sure you’re not letting yourself in for a nasty surprise further down the line. By the same token, look out for other ‘hidden’ charges, such as acceptance, arrangement or early repayment fees, which may not be immediately apparent.