What Are the Main Obstacles to Getting Approved for a Secured Loan?

A secured loan application can face several hurdles, but the main obstacles are typically a poor credit history, insufficient equity in your property, and failing the lender’s affordability checks. Lenders need to be confident you can repay the loan and that their investment is protected by the value of your home. Remember, a secured loan is tied to your property, which could be at risk if you fail to make repayments.

What Are the Main Obstacles to Getting Approved for a Secured Loan?

A secured loan, often called a homeowner loan or second-charge mortgage, allows you to borrow money using the value of your property as security. This can make them a useful option for borrowing larger sums or for individuals who may struggle to get an unsecured loan. However, lenders still have strict criteria to protect both themselves and you, the borrower.

Understanding the common hurdles can help you prepare a stronger application and manage your expectations. This guide explores the most significant reasons a secured loan application might be declined, answering the question: what are the main obstacles to getting approved for a secured loan?

1. A Poor or Limited Credit History

One of the first things a lender will assess is your credit history. Your credit report provides a detailed record of how you have managed debt in the past. Lenders see a history of missed payments or defaults as a sign of higher risk.

Common credit issues that can be obstacles include:

• Missed or late payments: A pattern of failing to pay bills on time for credit cards, loans, or even utility bills can be a red flag.
• Defaults: A default is recorded when you have missed several payments on a credit agreement and the lender has closed the account.
• County Court Judgements (CCJs): This is a court order demanding you repay a debt.
• Insolvency arrangements: Having a history of an Individual Voluntary Arrangement (IVA) or bankruptcy can make it very difficult to get approved.

While some specialist lenders offer secured loans for people with bad credit, your application is still not guaranteed. A weaker credit history usually results in higher interest rates to offset the lender’s perceived risk. Before applying, it’s wise to review your credit file to understand your position. Get your free credit search here. It’s free for 30 days and costs £14.99 per month thereafter if you don’t cancel it. You can cancel at anytime. (Ad)

2. Insufficient Equity in Your Property

A secured loan relies on the equity in your home. Equity is the portion of your property you own outright—its current market value minus any outstanding mortgage or other loans secured against it.

Lenders use a calculation called Loan-to-Value (LTV) to determine how much they are willing to lend. LTV represents the total borrowing against the property as a percentage of its value.

For example:

• Your property is valued at £300,000.
• Your outstanding mortgage is £180,000.
• Your current LTV is 60% (£180,000 ÷ £300,000).
• You want to borrow an additional £40,000 with a secured loan.
• Your total borrowing would become £220,000 (£180,000 + £40,000).
• Your new LTV would be approximately 73% (£220,000 ÷ £300,000).

Most lenders have a maximum LTV they will accept, often around 85%. If the new loan pushes your total LTV above their limit, your application will likely be rejected. Having low equity is a significant obstacle because it leaves little buffer for the lender if property prices fall or if they need to repossess and sell the property to recover their funds.

3. Failing Affordability Checks

Even if you have plenty of equity and a perfect credit score, you must prove you can afford the monthly loan repayments. Lenders have a regulatory duty to lend responsibly, which means conducting a thorough affordability assessment.

This involves:

• Income Verification: You must provide evidence of a stable and reliable income. This is straightforward for salaried employees but can be more complex for the self-employed, who typically need to provide one to two years of accounts or tax returns.
• Expenditure Analysis: Lenders will examine your bank statements to understand your monthly outgoings, including household bills, existing debt repayments, childcare costs, and general living expenses.
• Debt-to-Income Ratio: They calculate the ratio of your total monthly debt payments to your gross monthly income. A high ratio suggests you may be overstretched financially.
• Stress Testing: Lenders may also “stress test” your finances by calculating if you could still afford repayments if interest rates were to rise significantly.

If the lender concludes that the new loan payment would put too much strain on your finances, they will decline the application to prevent you from falling into financial hardship.

4. The Type or Condition of the Property

The property itself is the security, so its type, condition, and saleability are important to the lender. Some properties are considered “non-standard” and may be an obstacle to getting a loan.

Examples include:

• Non-standard construction: Homes made from materials like concrete, or properties with a steel or timber frame.
• Ex-local authority flats: Particularly those in high-rise blocks.
• Short leaseholds: Properties with a lease of less than 80-85 years remaining can be difficult to borrow against.
• Location or condition: Properties in a state of disrepair or located above commercial premises (like shops or restaurants) may also be problematic.

The underlying concern for the lender is whether they could easily sell the property to recover their loan if you were to default.

5. Your Employment Status

Linked to affordability, your employment status is a key factor. Lenders prefer applicants with a long and stable employment history in a permanent role. Being recently self-employed, working on a zero-hours contract, or being in a probationary period at a new job could be seen as a risk, making it a potential obstacle to approval.

Final Considerations and Risks

Navigating the secured loan application process can feel complex, but understanding these main obstacles can help you prepare. Addressing issues with your credit, calculating your available equity, and having a clear picture of your income and outgoings will put you in a much stronger position.

It is crucial to remember that a secured loan is a significant financial commitment. Because it is tied to your home, your property may be at risk if repayments are not made. Failing to keep up with repayments can have serious consequences, including the possibility of legal action, repossession of your home, increased interest rates, and additional charges from the lender.

For impartial guidance on borrowing and to fully understand the commitments involved, you can visit the MoneyHelper guide on secured loans. A professional broker can also help assess your circumstances and find a lender who is most likely to approve your application.