If you want to borrow a particularly large amount of money, then the bank or building society (or other creditor) that you wish to borrow from may require you to back it against an asset you own.
Read this short guide to find out more about secured loans, including what kind of assets you can use as security, and about the advantages or disadvantages as compared to unsecured loans.
In this guide:
What is a secured loan?
A secured loan is, rather simply, a loan that you take out with a particular asset of yours put up as security. This means that, until you repay the loan (plus interest), the creditor from whom you are borrowing the money retains legal ownership of the asset in question.
Generally speaking, if you want to borrow more than £25,000, you will be required to put up an asset as security.
The amount you borrow will be mostly determined by the value of the asset or, more properly, by the value of your equity (that is, the portion you actually own outright) of the asset.
Things like the rate of interest that you pay, and the length of the borrowing term, will depend on your personal financial circumstances and credit rating, as will the value of the loan itself to a certain extent.
What can I secure my loan against?
For the most part, you’ll need to secure your loan against your house, hence why secured loans are commonly known as homeowner loans.
Note that a homeowner loan is different from a mortgage, while the latter is still a kind of loan secured against a home.
You can take out a homeowner loan if you already have a mortgage on your property, by using the equity you own as security.
Typically, the maximum amount you can borrow with a secured or homeowner loan is around £125,000. If you need more than that and you own your home outright, then you will be better off taking out a mortgage or, if you already have a mortgage but have a significant amount of equity that you wish to release, you could consider remortgaging.
For more information on mortgages and remortgaging, head over to our section on mortgage guides.
You can also take out loans secured against your car. This is known as a logbook loan since, when you take one out, you’ll be required to give your vehicle’s registration document or logbook to the creditor for the duration. The value of the loan will be determined by the value of the car, though exactly how close to the value of the car you’ll be able to borrow will vary.
Generally speaking, logbook loans are both expensive and rather risky, and so you should seriously consider other options before you take one out.
Things to be Careful of
The main, and most obvious, issue with secured loans is the risk of losing the asset that you’ve backed the loan against if you default on any payments.
As with any kind of loan, you should always pay attention to all of the small print to make sure that you are getting a good deal in terms of interest rates.
Secured Loans vs. Unsecured Loans
As a general rule, a secured loan will be better than an unsecured loan with regard to the length of the borrowing term and, of course, the amount that you can borrow.
However, if the associated risks of losing ownership of your home are not something that you wish to face, then taking out a smaller, unsecured personal loan might be the better option.
Additionally, unsecured loans often come with lower interest rates, particularly if you are borrowing smaller amounts.
For more information on unsecured loans, head over to our guide on the topic, or for a broader overview, read our guide on types of loans.