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A secured loan is money you borrow that is secured against an asset you own, usually your home. The interest rates tend to be cheaper than with unsecured loans, but it can be a much riskier option so it’s important to understand how secured loans work and what could happen if you can’t make the payments.
Secured loans are often used to borrow large sums of money, typically more than £10,000 although you can borrow less, usually from £3,000.
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The name ‘secured’ refers to the fact that a lender will require something as security in case you cannot pay the loan back. This will usually be your home.
Secured loans are less risky for lenders, which is why they are normally cheaper than unsecured loans.
But they are much more risky for you as a borrower because the lender can repossess your home if you do not keep up repayments.
There are several names for secured loans, including:
Debt consolidation loans that are secured on your home can be first or second charge.
If it’s a first charge mortgage, it means you’ve taken out a loan for home improvement – for example, when you have no existing mortgage.
Whereas a second charge mortgage involves setting up a separate agreement with your existing mortgage lender or going to a different lender.
You can get a further advance on your mortgage – where you borrow an additional amount of money against your home from your current mortgage lender.
This is an option if you’re looking to pay for some major home improvements or to raise a deposit to buy a second home, for example.
[n] Some secured loans have expensive arrangement fees and other charges. Make sure you factor this in when you work out how much the loan is going to cost you. Arrangement fees and other set-up costs should be included in the Annual Percentage Rate of Charge (or APRC – this is similar to the APR for unsecured loans). Use the APRC to compare products.
An unsecured loan is more straightforward – you borrow money from a bank or another lender and agree to make regular payments until it’s paid in full.
Because the loan isn’t secured on your home, the interest rates tend to be higher.
If you don’t make the payments, you might incur additional charges. This could damage your credit rating.
Also, the lender can go to court to try and get their money back.
This could include applying for a charging order on your home – although they should make clear upfront, whether or not this is part of their business strategy.
Some loans might be secured on something other than your home – for example, it could be secured against your car, or on jewellery or other assets that you pawn, or you could get a loan with a guarantor (such as a family member or friend) who guarantees to make repayments if you can’t.
If you are unhappy, your first step should be to complain to the loan company.
If you don’t get a satisfactory response within eight weeks you can complain to the Financial Ombudsman Service.
This article is provided by the Money Advice Service.