Secured Loan Example and Explanation – Full Guide

Are you wondering what is a secured loan? You’ve come to the right place for answers. Every month, our website is visited by over 6,900 people who are seeking advice on similar matters.

In this easy-to-understand guide, we’ll address the following questions:

• How does a secured loan work?
• Are there different types of secured loans?
• What are five examples of secured loans?
• Where can you get a secured loan?
• What are the interest rates on secured loans?

I know that understanding secured loans can be a bit tricky. But don’t worry; we’re here to help you make an informed decision.

Let’s get started!

How does a secured loan work?

Secured loans work by giving the borrower a lump sum (most of the time!), and the borrower then repays this personal loan through monthly instalments until the loan has been fully repaid. The loan is charged with a variable or fixed interest rate, which is included within the monthly repayments.

As long as all repayments are made within the repayment period, the loan will be fully repaid and the debt cleared.

In this sense, secured loans are no different from unsecured personal loans when repayments are met. It’s only when payments aren’t met that the real difference between secured and unsecured personal loans can be seen.  

Additional costs

It’s important to consider any additional fees which might apply as part of the loan, such as application fees, appraisal fees, early repayment fees, and late payment fees.

Will a secured loan affect my credit score?

Repaying on time can have a positive effect on your credit score and make securing further credit somewhat easier in the future. However, remember that any defaults will further damage it. On top of that, making multiple secured loan applications within a short period can negatively impact your credit score.

What happens when you don’t repay a secured loan?

When you don’t pay a secured loan as agreed, the security you listed within the credit agreement is at risk. The lender may choose to repossess and sell the asset used as collateral and then take back its money from the sale proceeds. Any money left after the debt has been cleared will be your money. 

The lender won’t choose this course of action straight away. It will give the borrower chances to catch up with repayments before deciding on forcing the sale of the asset. 

There are times when the lender will choose not to force the sale of the asset, such as a property.

On top of this, the defaulted loan will be recorded on your credit history and lower your credit score. This will make it more difficult to get approved for unsecured or secured loans in the future. 

Secured loan example

Sarah and Justin own their own home but want to make some changes to an outdated bathroom. They decide they want to borrow money to complete the update and will take out a secured loan rather than waiting to save enough money. 

They estimate that they need £7,000 for the new bathroom and therefore take out a secured loan for £7,000 with their bank. The loan they take out with the bank requires them to secure the loan with some of their home equity. Fortunately, Sarah and Justin have kept up with mortgage repayment for many years and, therefore, have lots of equity in their property. 

They immediately start making repayments on the secured loans and pay off the loan without any problems. But if they had missed multiple payments, the bank may have decided to force the sale of Sarah and Justin’s property to clear the debt.

Are there different types of secured loans?

Yes, there are different types of secured loans. Some secured loans require you to list different assets as security, such as property, property equity or even something like a vehicle. 

Moreover, not all secured loans pay out a lump sum or require monthly repayments to begin straight away.

What are five examples of secured loans?

Five common examples of secured loans are:

1. Mortgage loan (residential and BTL)
2. Home equity loans, including homeowner loans and home equity lines of credit (HELOC)
3. Vehicle loans
4. Secured credit cards
5. Pawnshop loans

Mortgage loan

Mortgage loans are a loan from the bank that is exclusively used to purchase a property. They can be split into two types of mortgages: either a residential mortgage used to buy a property you plan to live in or a buy-to-let (BTL) mortgage for a property you plan to rent out. 

The mortgage is secured by the property being purchased, meaning the mortgage lender can repossess and sell the property if the buyer cannot keep up with mortgage repayments. 

For example. John might buy a £165,000 flat as an investment property in Manchester. To do this, he had a £65,000 deposit and took out a BTL mortgage for £100,000. If John was to stop paying his BTL mortgage, the lender could take back the property and sell it. From the sale proceeds, the money will be used to clear the debt, and the remainder will be John’s. 

Home equity loans

Home equity loans are loans that are secured by home equity rather than property. So, if you build up enough home equity by continually paying off a mortgage (or paying it off completely to give you 100% equity), you can secure a loan against the equity rather than the property as a whole. 

For example, Rob and Beth might have been paying off their mortgage for over a decade and have over £100,000 equity in their property. They could secure a loan with this equity to access a large lump sum to be spent how they want. They will then repay the loan each month until it has been repaid – with interest. 

Is a HELOC the same as a home equity loan?

There is a variation of the home equity loan called a HELOC. This loan doesn’t provide a lump sum. Instead, the homeowner gets a draw period where they can draw down on their loan a bit like how you use a credit card. It’s followed by a repayment period a few months or years later where the homeowner has to start repaying on the amount they drew down only. 

If you borrow against your home equity with existing mortgage debt, the mortgage lender has the senior lien of credit. This means in the event of foreclosure (forced property sale!), the mortgage lender gets first access to sale proceeds to clear the mortgage. Only then can junior liens of credit – i.e. equity loans – access the sales proceeds to clear other debts. 

This is why a home equity loan provider may not choose to foreclose if you have missed payments. But it all depends on the situation. 

There are other secured loans that also use home equity as collateral, including homeowner loans and home improvement loans. 

Vehicle loans

Different types of loans exist that secure a vehicle within the loan agreement. Some of these loans are to pay for the vehicle itself in a similar way you use a mortgage to pay for a property. 

For example, a Hire Purchase (HP) Agreement could be considered a secure loan. This is where you put down a deposit to purchase a new car, and a finance company pays the rest. You then pay the finance company each month until the loan and interest have been fully repaid. 

You only become the full vehicle owner after making the final payment. 

Secured credit cards

Secured credit cards work identically to regular credit cards with one main difference. The credit you spend on the card is secured by an asset, usually property or equity. If you don’t pay the credit card off, you could be forced to sell the asset, and your credit score will be affected. 

Pawnshop loans

You might be able to take an item to a pawnshop and ask for a loan by securing the item. The pawnshop will value the item and then give you a loan, and you’ll receive the item back once the loan has been repaid. Pawnshops usually accept jewellery and watches as security for a loan. 

Where can you get a secured loan?

You can find secured loans with banks and online loan companies. 

What are the interest rates on secured loans?

Interest rates vary. You may find some secured loan rates comparable to mortgage interest rates. Some rates may be variable, while others may be permanently or primarily fixed.