What is a secured loan?

A secured loan is a loan that is secured against something valuable - in most cases, a house or flat. This means there`s less risk for the lender, and that means secured loans tend to come with lower interest rates than unsecured loans. It also means lenders are likely to lend people greater amounts than they would if the loan wasn`t secured.

Secured loans & houses

If you take out a secured loan, you`re using your home to guarantee you`ll pay back that loan: if the worst comes to the worst and you can`t repay it, the lender knows they`ll have the option of forcing you to sell your house so you can pay them back.

That doesn`t mean you`ll simply lose your house if you miss one loan repayment! As with any debt, if you can`t keep up with the repayments, the first thing to do is talk to the loan provider who gave you the loan. They should be willing to help you work out an affordable way of repaying what you owe.

Even so, it`s vital you make sure you can afford your loan repayments - at the same time as paying back your mortgage and any other loans, credit card bills, etc. which you may have.

Secured loans & equity

So, how much can you borrow? It depends how much equity you have in your house. Equity is the portion of the house that is already entirely yours (i.e. that you don`t owe anything on in terms of mortgage / secured loans).

If you have a £50,000 mortgage on a house that`s worth £150,000, you have £100,000 of equity, so you could secure a loan of up to £100,000 against that equity - in theory.

In practice, you should only borrow as much as you can afford to repay. You should also be aware that you`re reducing your equity, which is potentially dangerous when house prices are falling - if you end up owing more on your home than it`s actually worth, you`ll be in `negative equity`.

Tags: loans, secured loans, secured, loan, unsecured loans, equity

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