What is a secured loan and how do you know if it's right for you?

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Is a secured loan right for you?

Secured loans let you borrow large sums of money for a long period of time, and can be a great option if you have a lower credit rating.

A secured loan gets 'secured' against one of your assets (things you own) – typically your home or your car.

Lenders offer secured loans so they can offer bigger loans, or lend to people with lower credit scores. To secure a loan, they'll ask you to promise something you own as a guarantee to them, in case you can't pay your loan back.

So it's important to understand the risks involved before you take one out

If you don't keep up with your repayments, the lender could take your car or home away from you.

In this post, we'll go through some pros and cons of secured loans, how you can make them work for you, and what other options might be better.


Before you look at taking out a secured loan, why not see if you're eligible for a personal loan with Monzo first?

All the checks we make before we decide if we can give you a loan are soft searches. This means applying for a Monzo loan won't affect your credit score

If you're eligible, we offer 3.7% APR representative on loans of £7,500 to £15,000, and 19.5% APR representative on loans up to £7,500. And we're fully regulated by the Financial Conduct Authority (FCA).


How do secured personal loans work?

Secured loans work in the same way as 'normal' loans or unsecured loans.

You apply for a loan from a lender, telling them the amount you want to borrow and how long you want to borrow it for. If your application is accepted, the loan will be offered at a certain interest rate. You can then choose to accept or reject the loan. If you accept it, the money is usually delivered the next working day.

The biggest difference is that the loan's secured against something you own. Most of the time that's your home, which is why secured loans are sometimes called homeowner loans.

But the loan doesn't have to be secured against your home. There are different types of secured loans, and you can also use other items to secure a personal loan. It just needs to be an asset the lender sees as valuable, like your car, motorcycle etc.

Securing your loan against something you own does make missing your monthly repayments a lot more risky. If you keep missing your monthly payments, you could lose the thing you secured it against.

Once you have the money, you can use the loan for whatever you want – just like any other loan. Some of the more common uses for the sum of money are to make home improvements to add value to your property, or as a debt consolidation loan to pay off debts with a higher interest rate.

One big difference between secured and unsecured loans is how lenders refer to the interest they charge.

The lender uses APRC, which stands for 'Annual Percentage Rate of Charge'. Your APRC will include the rate of interest plus any other fees, like broker fees. The APRC tells you the overall cost of the loan at any given time. So there shouldn't be any surprises.

This is used instead of APR - which lenders will more commonly use to describe how much you'll pay for a loan over a year, as a percentage.

Read our guide on interest here.

What can be the benefits of a secured loan?

If you have a lower credit score, secured loans can sometimes be a good way to borrow larger amounts of money, if you've not been accepted for a personal loan before.

If you have a good credit history, it can also give you an opportunity to get a lower interest rate on the total amount you borrow compared to a traditional loan.

They can also be a good alternative for people who need a large amount of equity, but don't want to go through the process of remortgaging their property.

Are secured loans easier to get?

In some ways, yes. If you have a lower credit score, you may be more likely to get accepted when applying for a secured loan than a traditional one.

The lender will still do a credit check to see if you're a 'responsible' borrower who'll pay back their loan on time.

This check, as well as your other personal circumstances, will help them determine the total amount you can eventually borrow. If the lender has doubts, you may not get the amount of money or loan term you were after.

Is a secured loan bad for your credit score?

Taking out a secured loan won't impact your credit report in the way a short-term or payday loan will. In fact, if you were to take out a secured loan and make all your monthly payments on time and in full, it could actually look good for your credit score!

Does a secured loan build your credit score?

While secured loans could help improve your credit rating, it's not always helpful to look at getting one just to improve your credit score. The risks involved can be high!

Applying for a credit card that's designed to help build your credit score, provided you pay off each balance in full, could be a quicker and safer option.

Taking out a smaller personal loan might be a safer option as well. At Monzo, if you're eligible we offer 3.7% APR representative on loans of £7,500 to £15,000, and 19.5% APR representative on loans up to £7,500.

It only takes 3 questions to see if you're eligible.

Can I use a secured loan to pay off credit cards?

This will depend on your personal circumstances, but you can use secured loans as a debt consolidation loan, to help you pay off high interest rate debt, like credit cards.

Whether it's right for you will depend on your ability to stick to a budget and avoid missing payments.

There may be other, less risky methods to help pay off your credit cards. In our guide we cover some of those techniques, including the avalanche method.

Can you pay off a secured loan early?

Lenders will usually charge you an early repayment fee if you want to pay off your secured loan early. Some unsecured personal loan lenders (like Monzo 👋) won't charge you.

Check in your terms of agreement, but the lender should make this amount clear upfront when you apply for the loan, and you typically won't have to pay one or two months' worth of interest as a charge. Settling the loan and getting peace of mind sooner can sometimes be well worth the cost.

Is a secured or unsecured loan better for you?

Deciding which is better for you will depend on a number of factors: your credit score, the amount you want to borrow, and your risk appetite. In some scenarios, a secured loan might be better for you - but you'd be wise not to underestimate the risks attached with securing the loan against your home.

If you're looking for a secured loan, the best way to find one is through a credit broker or comparison site.

For personal loans, find out if you're eligible to use Monzo! Read more about it here. 💸