There are so many ways to borrow money that it can be easy to overlook even the most common of terms. Secured borrowing is a very general term and could cover many types of lending from mortgages to pawnbroking. The general theme is that you provide collateral which the creditor can sell to recover their costs in case of non-payment of the loan. Our credit line product, in contrast, is an unsecured borrowing method. We lend money directly to you following a successful application based on assessing your creditworthiness and affordability of repayments without securing it with assets.
Secured borrowing covers a wide variety of loans. Some of the most common types of secured loans include:
The money you borrow from the car finance is secured against the vehicle, so if you fail to make the repayments then the car or van may be recovered by the lender.
It is easy to overlook mortgages when thinking of different types of loans because they are so common, but when you take out a mortgage, you have to make monthly loan repayments. If you miss the repayments, the bank can repossess the property and sell it to recover its costs.
Though a little old-fashioned now, a pawnshop loan is possibly the easiest way to understand how secured borrowing works. You offer an asset of value to the pawnshop, and they lend you an agreed sum in return (usually much less than the value of the asset). Assets might include expensive jewellery, a painting or even a car. You then make the agreed repayments and at the end of the loan term, the item is returned to you. If you don’t pay however, the pawnshop can sell your asset, so they aren’t out of pocket.
The above examples hopefully help explain how secured borrowing works, but ultimately it is a fairly simple process. You offer collateral against a loan. You make your repayments and then the security is returned to you, or you become the owner of the asset (in the case of car finance or mortgages).
Offering security against a loan does not mean the creditor will necessarily provide a bigger loan amount: the security is to mitigate the risk of non-payment, as the idea is you do not want to lose the asset you have pledged. However, in some cases it means lenders can offer their loan service to a wider demographic, including those without a good credit score – similarly to guarantor loans, there is less risk of the lender losing money as there are secondary sources of repayment. Using a secured loan often means lower rates of interest too.
Typically, these types of loans are secured against your home, even if you are not taking out a mortgage, but lenders may consider other assets of high value as well. Lenders will usually only accept security that is valued much greater than the loan principal because of the costs involved in realising the asset. This is why it is common to secure a loan against your house, even if your house is worth £250,000 and your loan is only worth £20,000. It is important to note that in most cases, a lender would have to gain approval from your mortgage provider and any other creditor who holds equity in your property before they can start asset realisation or repossession.
Secured borrowing works in a similar way to most other types of credit. Once you have chosen a lender, you will need to submit an application. The applications will likely vary depending on the size of the loan and its purpose. For example, a mortgage application can take days to review, whereas a pawnshop loan may take a few minutes or hours. You will be required to pledge the security via a legal document. In many cases, you will retain possession of the asset for the duration of the loan term, but in some cases, like with a pawnshop loan, you will be expected to give the collateral to the lender, which will be returned upon your final instalment. The lenders still have to assess your application even though you are providing security as they still have an obligation to lend responsibly. Applying for any type of secured credit usually takes much longer than applying for unsecured credit like an instant loan.
Usually, lenders will assess your circumstances and try various avenues of repayment arrangements before realising your collateral or repossessing your home. Recovering the costs of the loan through the security you provided is expensive for lenders and can create a bad reputation which heavily influences consumers’ choices when looking to borrow. Repossession and realisation of assets is never a good outcome for anyone and it is a last resort option for lenders.
At the end of adverts for mortgages, you may hear the phrase “your house may be repossessed if you fail to keep up with your mortgage repayments”. Though repossession is a last resort for banks, they are within their legal rights to evict you and sell your house if you don’t make your repayments on time. This may be the worst of the consequences of not making your secured loan repayments, but it helps highlight just how serious it is when you miss repayments. Even if the loan is unsecured, you can still face arrears, negative impact on your credit file and, in some cases, bailiffs. While your loan may not be secured, there is still legislation in place to allow some lenders to take possession of your assets if you fail to pay a loan. Again, this is the worst case scenario and happens quite rarely, but it is still a possibility.
If you cannot make your repayments towards your loan – whether secured or unsecured – you should get in touch with your lender as soon as possible. If they can’t advise you on the next steps to take, they can signpost you to debt advice charities who will be able to assess your circumstances, while agreeing a temporary measure to help you keep your account up to date in the meantime.
Choosing a type of credit is not always a simple process. You have to consider your financial and personal circumstances and take into account the reason for your borrowing. If you only need a few hundred pounds for a week or two, or you are looking to get a small loan with bad credit history, it is probably not necessary to go through the process of taking out a secured loan. However, if you want to do an extension on your house, you may want to remortgage or take out a second mortgage to finance the costs.
Lenders will conduct affordability and creditworthiness assessments to make sure the loan is affordable, and in the case of secured borrowing, they also require collateral. But this doesn’t mean you don’t share some of the responsibility when you apply for credit – you have to choose a sensible option and you have to be sure you can afford the repayments. While a lender can look at the most up to date information on your credit file and bank statements, they won’t know your future financial commitments (unless you tell them).
Ultimately, secured borrowing is just another type of credit. It comes in various shapes and sizes and often the most common types of secured loans are not considered as “secured” because of the way the finance is marketed, and because in some cases like car finance, you have full use of the asset during the loan term.
Not everyone likes the idea of secured borrowing for many reasons – namely that you might lose the asset if you experience long-term financial difficulty and miss several repayments. There are unsecured options available, even if you have bad credit, such as a credit line or a payday loan. Guarantor loans are also considered reasonable alternatives to secured loans.
While you might become comfortable using a particular service, you should never stop looking around in case there are better options available. In the same way you should never auto-renew your car insurance without running a comparison first, using a different type of credit from time to time might save you money, and this is true for all types of credit – from credit cards to mortgages to credit lines.
Finding an alternative to secured loans will depend on your circumstances and how much you are looking to borrow. If you need a large sum of money in the thousands, then a bank loan or high credit limit credit card may be an alternative borrowing option to secured lending. However, these types of credit usually require a good credit history; if you know your credit score is not brilliant and you are intending to make a large purchase in the future, you may want to look at ways to improve your credit score now, so you are better positioned to apply for mainstream unsecured borrowing when you need it.
If you are looking to get a small loan with bad credit and you don’t want to provide a secondary source of repayment, then a credit line could be another option to consider, as they are quick to process and are an accessible way to borrow money quickly.
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