Thinking about getting a secured loan but you're unsure about the different interest rates?
In this blog, we’ll explain the different types of rates you may be able to get and how you can try to find the right option for your needs.
What is interest?
Interest is the cost of borrowing money. Essentially, it is extra money charged on top of your loan, which is usually given as an annual rate. However, some loans (like bridging loans) may charge monthly. When you repay the loan, you're paying back both the amount you borrowed and the interest.
By charging interest it helps lenders cover the risk they take by lending to you. For example, if you’re unable to repay the loan, they risk losing the money they lent to you. So, to protect themselves, lenders charge interest rates. This is why higher-risk loans usually come with higher interest rates.
How are secured loan rates determined?
Since these loans are secured against a property you own, the interest rates are often lower than unsecured loans already. This is because if you default on the loan, the lender can repossess the property, so they can recover the money they lent to you.
However, several other factors can still affect the rate you're charged, including:
- Your credit history and score: Lenders charge higher interest rates if they consider you a higher risk. So, if you have a poor credit history (like missed payments or defaults), you may face higher rates because lenders take on more risk by lending to you.
- Market conditions: Interest rates can be influenced by what’s happening in the financial market. For example, when the Bank of England raises the base rate, borrowing becomes more expensive for lenders, so they may increase their interest rates to cover those costs.
- Lender type: Each lender has their own criteria. This means the interest rate you get can depend on which lender you qualify with and their specific terms.
Different types of rates that can be charged
There are two main types of interest rates you might be charged: fixed and variable.
- Fixed rate: The interest rate stays the same throughout the loan term, so your monthly repayments won’t change. This makes it easier to budget because you’ll know exactly how much you’ll pay each month.
- Variable rate: The interest rate can change over time, depending on factors like market conditions. For example, if the Bank of England base rate goes down, your repayments may decrease. However, if it goes up, your repayments could increase, making the loan more expensive.
Learn more about these types of rates in our blog on interest rates simplified.
How to find the best secured loan rates
Finding a good rate may seem challenging, but there are steps you may be able to take to improve your chances.
Choose the right lender
Each lender offers different rates and loan products. So, make sure you shop around and compare options instead of settling for the first one you find. Using a broker can help, as they can access multiple lenders and compare options for you. Keep in mind that brokers may charge a fee for their services, so consider this cost when making your decision.
Avoid making big purchases before applying
Lenders will review your bank statements and finances to determine what you can afford. Large purchases could affect your eligibility and impact the terms you are offered.
Improve your credit score
If getting a low rate is important to you, consider improving your credit score before applying. While it can take time, boosting your score can help you qualify for better rates. However, this may not be possible for everyone, so consider your situation before making a decision.
Avoid applying to multiple companies at once
Each application can result in a hard credit check, which may lower your credit score and result in higher rates.
Negotiate with your lender
You can always try negotiating with your lender. If you have a good credit history and significant equity in your property, you may be able to get a better rate.
Summary
Navigating different secured loan rates can be hard, but knowing what affects them and the types of rates available can help you make better decisions. Your credit history, the current market conditions, and the lender you choose all play a role in the rate you’re offered. So, it’s a good idea to research before you apply to ensure you get the right offer for your needs.
Loans are secured against property. Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.
