Secured loan interest rates and charges
A guide to the rates and fees that come with secured finance, to help you make the right borrowing decisions.
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How do interest rates work?
Let's take a moment to understand what a secured loan actually is. A secured loan is a type of loan where you use an asset – typically your home – as collateral. This means if you don't repay the loan, the lender can take possession of your asset to recover the money.
Because the lender has something to fall back on (your home or another valuable asset), secured loans typically come with lower interest rates compared to unsecured loans, because the lender knows they have your home as security.
How interest is charged
Interest rates are usually either fixed or variable:
- Fixed rate loans: Here your interest rate stays the same for the entire term of the loan. This means your monthly payments are predictable, which can make budgeting easier.
- Variable rate loans: Here the rate can change over time, usually in line with the Bank of England's base rate or market conditions. Your monthly repayments could go up or down throughout the loan.
Let's say you borrow £20,000 at a 6% fixed interest rate over 5 years. Your repayments will be the same every month, and you'll pay a total of £23,199 by the end of the loan. With a variable rate, your repayments might change, and the total amount you repay could end up being higher or lower depending on the market.
Charges and fees with secured loans
While interest rates are an important factor when deciding on a secured loan, you should also be aware of the additional charges and fees that can apply, which can increase the overall cost.
Upfront charges
Some secured loans come with setup fees or arrangement fees to pay before the loan is even approved. These can vary, so it's important to ask the lender for a full breakdown of the fees before you sign anything.
Early repayment charges
If you manage to pay off your loan early, you might be charged an early repayment fee. Some lenders include this as a way to cover the interest they would have made if you had kept the loan for its full term. These charges can vary, but they typically range from 1% to 5% of the loan balance.
Late payment charges
Missing a payment or paying late can also come with a fee of around £12 to £25. As well as affecting your costs, a late payment can show up on your credit score, making it harder for you to borrow in future. These charges can vary, but it's essential to stay on top of your payments to avoid these extra costs.
How to reduce the cost of your secured loan
Secured loans can be a cost-effective option, but only if you take the right steps to reduce your overall charges.
Shop around for the best rates
Different lenders offer different interest rates, and these can vary widely. Don't just settle for the first offer you receive. Instead, compare different lenders to find the best deal. Online comparison tools can be a great way to quickly see which lenders are offering the lowest rates and best terms.
Improve your credit score
Your credit score plays a big role in determining the interest rate you'll be offered. The better your credit score, the more likely you are to get a lower rate. If you're not sure where you stand, check your credit report and work on improving your score before applying for a loan. This could mean paying off any outstanding debts and making sure you're not missing any payments.
Consider the loan term
The length of the loan term also affects the interest you'll pay. While longer loan terms give you more time to repay, they usually result paying more interest in the long run. Consider whether you can afford to pay the loan off in a shorter period to reduce the amount of interest you'll have to pay.
Consider a broker
If you're feeling overwhelmed by the number of loan options available, a broker can navigate the market for you, and help you access secured loans that aren't available elsewhere. They may be able to keep your rates and fees lower, but remember that they may charge a broker fee directly to you.
Summing up
Secured loans can be a smart way to borrow money, especially when you need a larger sum. The interest rates are typically lower than personal or unsecured loans because it's backed by an asset. But it's essential to keep an eye on additional lender fees, charges, and how the interest rate is structured.
By shopping around, understanding the charges, and making informed decisions, you can make sure you keep your secured loan costs as low as possible.
Frequently Asked Questions: Secured Loans
What can I use a secured loan for?
Secured loans come in all shapes and sizes - from small personal loans to homeowner loans for debt consolidation. Whatever the purpose, remember the loan is secured against an asset (like your home), so you should be confident in your ability to repay before taking one out.
Should I get a secured loan or an unsecured loan?
When deciding between secured and unsecured loans, consider the amount you need and whether you're comfortable using an asset as security. If you are, you may be offered larger loan amounts than with an unsecured loan, but you risk losing your asset if you fail to repay.
What is LTV and how does it affect my interest rate?
Your LTV (loan-to-value) ratio is the size of your loan compared to your collateral. If your home is worth £200,000 and you take a loan for £50,000, your LTV would be 25% (£50,000 ÷ £200,000). The lower your LTV, the less risk the lender takes on, and as a result, you might be offered a lower interest rate.
Is it possible to pay off my secured loan early without a penalty?
While some lenders allow early repayments without a fee, others do charge a penalty. Always check the terms and conditions before signing an agreement to understand any fees that may apply.
About the author
Lawrence Howlett
Lawrence Howlett brings a results-driven mindset to his writing, shaped by over a decade of experience across finance, legal, and energy sectors. As the founder of Moneysavingadvisors, he’s built a reputation for turning complex financial concepts into clear, actionable insights for consumers. His writing stands out for its clarity, structure, and focus on delivering value.
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