A secured loan is a loan taken out against the equity you own in your house. Whilst some secured loans can also be taken against other items you own of value, including a car loan, jewellery or some art work, the vast majority involve using your home as leverage to get a loan from the lender.
Secured loans are the cheapest form of loan for the borrower, because they represent the smallest risk for the lender. When a lender lends money, they must assess the risk, and will charge an interest rate accordingly. They will always try to make money with their interest rates, but generally speaking, the less risk the lender has in lending the money, the cheaper the loan will be.
When a borrower takes out an unsecured loan, that money is not secured against anything, so if the borrowers fails to meet their repayments, the lender has no way of taking anything from that borrower to make their money back. With a secured loan this is very different.
Customers who take out a secured loan will do so by securing their home against the loan, so if they fail to repay their loan, the lender can sell their home, and take the money they are owed from the sale price.
This means you must have enough equity in your home (i.e. the amount of the house you own without a mortgage) to be able to take out a secured loan.
Example:
Dave wants to take out a secured loan over 10 years for £15,000 to pay for an extension to his home. He lives in a £100,000 house with a £80,000 mortgage. This means he owns £20,000 worth of his home. Dave will have to check with his mortgage lender, but in principle should be able to take out such a loan, especially as the extension should increase the home’s value.
Many people will ask why you would want to take out a secured loan on a house, but essentially it’s just an extension of somebody’s mortgage, and works in the same way if you fail to pay your repayments.
Often those taken out secured loans do so to pay for home improvements, which will actually increase the home’s value, and over several years end up paying for themselves anyway.
A secured loan is a good way of borrowing a large sum of money over a long period without involving your mortgage and at a cheap interest rate.