When a loan is secured then one of your assets is used as security. This is the collateral, the asset pledged to the lender for repayment of the loan.

Loans can be secured against different types of assets but, depending on the size of the loan, it would usually be your house. If the equity in your house (the difference between the value of the house and any debts like the mortgage already secured on your house) exceeds the amount of the new loan then this new loan can be secured.

With secured loans the amount you can borrow could be substantial, up to £100,000 or more, and the repayment period (the term) could be up to 25 years.

The APR on the loan is often an indicator of the risk the lender perceives of a person defaulting (failing to meet a financial obligation). If security is provided for the loan then the lender is less concerned about the risk of default which, in turn, can lower the APR which will make the secured loan cheaper. They will, still, want to determine that you can afford the repayments but the chances of making a successful secured loan application at an acceptable rate is higher compared with an unsecured loan simply because the risk to the lender is less.

If there are issues with a borrower's credit rating, perhaps with defaults or CCJs, then a secured loan may be the only option as, otherwise, the lender may quote a very high APR to reflect the risk or even refuse credit altogether. This is because without security, the lender has to base the lending decision completely on the other factors like your credit report, the information you provide in the application process and their own history and experience of lending to their customers.

If you have bad credit then, without collateral, the lender may not want to rely on what would in effect be just a promise to pay back the money – if you don't make the monthly payments on time over the agreed term of the loan, there is no guarantee that they can get all of their money back even when they take legal action. Alternatively the lender may offer a very expensive loan (high interest rate) and / or offer to lend you a smaller amount, perhaps with a guarantor.

A secured debt consolidation loan can be an advantageous option to consider if you are at risk of getting a bad credit rating by defaulting on other loans like credit card debts. Paying off the unsecured loans with a new secured loan – where the monthly payments can be lower if the payments are spread out over a longer term – can prevent or make less severe a bad credit rating. However, lower monthly payments can mean that the unsecured loans will be replaced by a larger secured loan to be repaid over a longer period.

It is important to make the repayments on time with a secured loan because it is a priority debt. If it is secured against your house then the licensed lender has the legal right to sell your property to recover the debt if you don't keep up with the repayments, and if it is sold at auction then the proceeds from the sale could be less than you would expect from a 'normal' sale.

Summary of possible advantages of secured loans

• A lower APR can make the loan cheaper than an unsecured loan.
• If you are consolidating several unsecured loans into one secured loan with lower monthly repayments, then it may be easier to handle just one payment every month.
• If you are at risk of getting a bad credit rating from making late payments or defaulting on significant debts then a secured loan to pay off these other debts can be a good option.
• If you have poor or bad credit then providing security for the loan can make the difference between getting the loan or being refused credit.
• You can borrow much higher amounts over longer terms than with unsecured loans.

Summary of possible disadvantages of secured loans

• A loan secured on your house means that the lender can sell your house to recover the money if you do not keep up with repayments.
• If several unsecured debts are consolidated into one new loan then it can mean a larger debt repayable over a longer period.
• A fee is usually needed to set up the loan.