About loans with collateral

What is a secured loan?

A secured loan, or loan with collateral, is backed by an asset you own: a flat, a house, land or a car. If you do not repay, the lender can sell the asset to recover its money. Because its risk is lower, the lender can offer a lower interest rate, a larger amount and a longer term than for an unsecured loan. The rate depends mainly on the share of the asset’s value you borrow (the loan-to-value ratio), how easily the asset can be sold and your own credit profile: a loan for half the value of a flat in a city is far less risky for the lender than one for almost its full value.

Mortgages

A mortgage finances the purchase or construction of a home, and the home itself is the collateral. You usually need a down payment: in many European countries the central bank limits mortgages to around 80–90% of the property’s value, and the lender also checks that your income covers the payments. Mortgages run for decades, often with a variable rate linked to Euribor in the euro area.

Besides interest, expect a valuation of the property, notary and land registry fees, an arrangement fee and usually property insurance. Under EU rules you receive a standard information sheet (ESIS) with all the costs before signing and have at least seven days to consider the offer.

Loans secured by real estate for other purposes

You can also borrow against a property you already own and use the money for renovation, education, refinancing other debts or a business. Such loans secured by real estate are cheaper than unsecured loans of the same size, but you put your home at risk for a purpose that does not create new value. Consider them only if the repayments are clearly affordable.

Car loans and leasing

A car loan finances a new or used car, which serves as collateral; some lenders also lend against a car you already own. With a car loan, the car is yours but pledged until the loan is repaid. With leasing, the leasing company owns the car and you pay for using it:

Finance leasing covers the full value of the car, and at the end the car becomes yours or you can buy it for a set residual value.
Operating leasing is closer to long-term rental: you pay for using the car for an agreed period and mileage, and usually return it at the end.

Leasing companies often require comprehensive insurance and a down payment. Compare offers by the APR and the total cost including insurance, not only by the monthly payment.

Interest and costs

Lenders rarely publish a fixed rate for secured loans, because it is set individually based on your credit profile, the value and liquidity of the collateral and the loan-to-value ratio. A mortgage on a home usually has the lowest rate, a loan secured by a used car a noticeably higher one. Arrangement fees and rates are sometimes negotiable, especially for existing customers or during promotions, for example when leasing a new car.

What you risk

If you stop paying, the lender can sell the collateral, and if the sale does not cover the debt, you may still owe the rest. Before pledging your home or car, check that you could keep paying if your income dropped or, with a variable rate, if interest rates rose. If you run into difficulties, contact the lender early: rescheduling is far better than losing the asset.

Frequently asked questions

Can I pledge someone else’s property?
Some lenders accept it with the owner’s written consent. The owner then risks losing the property if you do not repay.

Is a guarantor the same as collateral?
No. A guarantor is a person who promises to repay if you do not; collateral is an asset. Both reduce the lender’s risk.

Can I sell a pledged car or flat?
Only with the lender’s consent, usually by repaying the loan from the sale price.