First, what is a secured loan?
A secured loan, also known as a second charge mortgage or homeowner loan, is a loan which is secured against as asset – usually your home but buy to let properties can also be used. The money can be used for any reasonable and legal purpose and it is repaid monthly over a term of between 3 and 25 years.
Using an online secured loan calculator will give you an understanding of how a secured loan would work and an estimate of the costs involved.
What do lenders consider when you apply for a secured loan?
The equity available in your property
Before the lender reviews your financial circumstances, they will need to look at your property. They will consider the value of the property and the amount of equity that you hold (the proportion owned outright by you).
If you already have a mortgage on the property then the lender will take this into consideration when working out how much you can borrow. There will be a maximum loan to value (LTV) which is the maximum percentage of the property’s value that you can borrow.
An example:
Your property is worth £300,000 with an outstanding mortgage balance of £165,000. This means the current LTV is 55%. If the secured loan lender is operating on a maximum LTV of 70% then you can borrow a further 15% of the property’s value, so £45,000.
Your income and outgoings
One of the main things that lenders consider when reviewing your secured loan application is your income and outgoings. This is because you need to make monthly repayments with a secured loan and they need to assess whether you can afford this.
They will look at all of your income sources, whether you are employed or self-employed, and they will look at all of your regular outgoings. This includes your mortgage payments, any other debts where you make regular payments, and your monthly bills. This will determine whether or not you can afford to make the secured loan repayments on top of your current monthly expenditure.
Your credit score
Lenders will also consider your credit score and history. They will look at how you’ve managed loans in the past in terms of the amount you’ve borrowed and whether or not you’ve made all of the repayments.
Unless you have a particularly poor credit rating, you should still get a secured loan even if you’ve had issues in the past. This is because the loan is secured against an asset (your home) so the lender has a way of recuperating the funds if you don’t repay it. However, the better your credit history, the better interest rate you’ll be offered (usually).
