Secured Loan Rates – What Are They? FAQs, Tips & More

How good are secured loan rates of interest? One possible advantage of choosing a secured loan over an unsecured loan is that you might get a lower interest rate.

So, what are secured loan rates really like, and what factors influence the rate you’re offered?

What are secured loans?

A secured loan is a type of loan that uses one of the borrower’s assets as collateral in the credit agreement.

There are different types of secured loans, but many of them use a property or home equity as collateral, meaning you are securing debts against your home, and your home may be repossessed if you do not keep up with monthly repayments.

You should think carefully before securing any debt with an asset. You can also find loans secured with vehicles and other assets.

To avoid illegal lenders, you should only apply for a secured loan from lenders that are authorised and regulated by the Financial Conduct Authority (FCA).

How do secured loans work?

Secured loans often provide the borrower with a lump sum of money, but there are some that give the borrower a draw period where they can take parts of the loan in stages. The loan is repaid with interest (secured loan rates can differ) over a fixed period of monthly repayments.

You are usually allowed to pay off a secured loan early if desired, but the lender may apply early repayment fees in the process.

If you cannot keep up repayments on the loan or pay off the full loan amount due each month, you should speak with your lender. They may renegotiate repayment terms for everyone’s benefit – and so they do not have to repossess and sell your asset to clear the debt and associated fees. You should communicate about any new financial problems to avoid losing your home if the debt is secured against property.

What are the advantages and disadvantages of a secured loan?

The advantages:

1. They can enable larger borrowing
2. They can offer lower rates of interest
3. You can sometimes get secured loans even with bad credit
4. There are many types for different purposes, e.g., homeowner loans and debt consolidation loans

The disadvantages:

1. Your asset and possibly your family home are at risk
2. There may be additional fees and charges (appraisal costs, closing costs, etc.)
3. Even fast secured loans may not be as quick as unsecured loans

What’s the difference between a secured and unsecured loan?

The main difference between a secured and unsecured loan is that secured loans require assets to be listed as collateral, whereas unsecured loans do not. Although this is the main difference, the difference creates some other subtle differences.

For example, using an asset as security in the loan agreement may help the borrower get a bigger loan or a competitive interest rate. However, this is also dependent on personal circumstances and your credit score.

How much can I borrow with a secured loan?

The amount you are able to borrow with a secured loan depends on multiple factors, including the lender and its loan-to-value ratio, the type of loan, what asset is being used as security, your finances and your credit score.

What is loan-to-value ratio?

Loan-to-value (LTV) ratio is a number lenders use to determine how much risk they’re taking on with asecured loan. It measures the relationship between the loan amount and the market value of the asset securing the loan, such as a house or car. A lower LTV ratio generally means you can get a lower interest rate because it poses less risk to the lender.

Some loans secured with property or home equity can provide significant credit, sometimes allowing you to borrow amounts exceeding £100,000.

Most unsecured loans provide loans up to a maximum value of around £25,000. Thus, you can usually take out a bigger loan with a secured loan over an unsecured loan. The reason for this is that the asset used as security makes it easier for the lender to recover any arrears, and it, therefore, reduces your lending risk. But, the exact amount you can borrow may be restricted by personal finances or a poor credit score.

Where can I get a secured loan?

Secured loans are advertised by banks, online loan providers and some mortgage lenders. Because the term “secured loans” covers a wide variety of loans secured by an asset, you may be able to get one type from one lender and others from different types of lenders.

For example, generic secured personal loans may be available from online loan companies, whereas second charge mortgages – also known as homeowner loans – might only be available from banks and mortgage providers.

Are secured loans easier to get?

It is considered slightly easier to get a secured loan compared to an unsecured loan. Having an asset reduces your lending risk, and therefore, lenders are more willing to give you a personal loan.

However, you must own the asset to list it as collateral, and in that regard, secured loans could be considered more difficult to get if you do not own a vehicle or have a property (with or without a mortgage).

In any case, secured loan applicants must still pass the lender’s affordability checks and will have their credit score looked at.

Here, you can see that this forum user onMoneySavingExpert wants to know if a secured loan is easier to get than an unsecured loan.

Are secured loans fixed-rate?

Some secured loans are advertised with a fixed rate of interest. This means loan repayments have the same interest rate across all payments, either for all of the loan repayment period or an initial period before switching to a variable interest rate. With fixed-rate secured loans, it is easier to budget exactly for your monthly payments as you always know the exact cost of the loan.

If you have to repay the loan with a variable rate of interest, this means the interest rate could change multiple times throughout the loan repayment term. 

Do secured loans have high interest rates?

Secured loans are offered with varying interest rates, and some are higher than others. The interest rate of a secured loan is not known to be higher than the interest rates offered through other forms of credit.

In fact, depending on your credit score and finances, you might be able to get a lower interest rate with a secured loan over a credit card or unsecured loan.

Do you get better rates on secured loans?

As mentioned, you can often get better rates on secured loans because using an asset as collateral makes it cheaper, quicker and easier for the lender to recover any arrears down the line.

However, secured loan rates are not just based on assets used as security; they consider your personal finances and your credit score. Although many people do get a lower interest rate by choosing a secured loan, others do not. There are no guarantees. 

What is the average interest rate on a secured loan?

The average (advertised) interest rate of a secured loan usually depends on the size of the loan and the type of secured loan. For example, the average interest rate on a secured personal loan may be different to the average interest rate on a second charge mortgage. And the representative example rate on one loan changes based on the amount you’re asking to borrow. 

For these reasons, the average advertised interest rate on a secured loan is difficult to state, but it falls within 3-10%.

What is the average interest rate on a secured personal loan?

Secured personal loans have an average interest rate between 2-10%. The rate fluctuates based on the loan amount and the loan repayment period. Many banks advertise these loans between £7,500 and £15,000 for a rate close to 8%.

But remember that personal circumstances will decide the rate offered to you. 

What are the best secured loan rates?

The very best secured loan rates hover around 2%. Getting a secured loan with a rate this low will make the loan significantly cheaper over a long period. But to get approved and offered these low rates, you’ll need to have an excellent credit history and prove the loan is easily affordable to you and any other applicant.

Some of the lowest secured loan rates are offered by high-street banks, UK supermarkets and even the Post Office. You may also find low rates through online loan lenders, but many of these lenders have higher rates than the aforementioned lenders. Always complete your own diligent research to avoid missing out on a better deal.

How can I compare secured loan rates?

Most lenders now advertise loans with a loan calculator on their website. This is an online calculator that lets potential borrowers enter the amount they want to borrow and how long they need to repay.

The calculator then uses these numbers along with its representative example interest rate to calculate how much it will cost to repay the prospective loan and how much monthly payments will be.

These secured loan calculators are an efficient way to find out how much a loan may cost with that specific lender, and because most lenders now use these calculators, they are a good way to compare different loans.

If you see any rates that are drastically lower than the average, make sure the lender is legitimate by ensuring it is authorised and regulated by the Financial Conduct Authority.

What are the limitations of online loan calculators?

There are many limitations to these calculators that you should be aware of as you make comparisons. The first is that they usually do not include any additional fees that may be applicable, such as admin fees or closing costs. You may need to compare these separately.

But even more importantly, these calculators must cater to the average user, and the interest rate offered is not always what you’ll be offered if approved.

Representative rates are based on what 51% of applicants were offered when approved (or better). Therefore, if you have a bad credit history with a low credit score, you could be offered a much higher rate than what the calculator suggests you’ll be offered.

Unless you have an excellent credit score, these calculators won’t be as reliable as you think.

Who can help me compare secured loans?

If using loan calculators is confusing, time-consuming or simply daunting, you can get help to compare and apply for secured loans. There are comparison websites that allow you to quickly scan the market to see where the best secured loan rates might be, or you can use a credit broker or financial advisor service.

If you need a second charge mortgage (also a type of loan secured), you may even want the assistance of a mortgage advisor.

These people and groups could save you time and stress and secure you a better deal, but it is never guaranteed. What is almost certain is that these services come at a cost. Sometimes, the additional expense is worth it in the long run, and on other occasions, that may not be the case.

Understanding loan terms and conditions

It’s really important to make sure you read and understand the loan terms and conditions, especially if you aren’t using a broker or other advisor. Make sure you are aware of any extra fees, such as application fees, appraisal fees, early repayment fees, and late payment fees.

Is a secured loan a good idea?

It is not possible to say whether a secured loan is or isn’t a good idea. How beneficial taking out a secured loan would be to you depends on your circumstances, credit rating and the purpose of the loan.

For some, it will be a fantastic way to access credit, especially if they want to borrow money beyond what is available through unsecured loans. For others, there may be more suitable and cheaper options to explore. 

Before you compare secured loan rates

Before you run off to start comparing secured loan interest rates, why not learn more about these types of loans and learn about the potential pitfalls here at MoneyNerd? It’s recommended that you fully understand secured loans before you start comparing options.