By Clare Yates
5 min read
If you’re a homeowner, secured borrowing can seem like a straightforward way to access a larger sum of money. Whether you’re planning home improvements, consolidating debts or covering another one-off cost, these loans can be appealing.
The trade-off is that secured borrowing means taking out a loan that is backed by an asset you already own, most commonly your home. That asset acts as security for the lender, and you could lose that asset if you don’t keep up with repayments.
What are the common types of secured borrowing?
There are a few different types of secured loan you might come across:
Homeowner loans: Borrowing a lump sum against your property, often used for things like home improvements or other large expenses.
Second charge mortgages: A separate loan taken out on top of your existing mortgage, using the equity in your home as security.
Further advances: Borrowing more from your current mortgage lender, increasing the amount secured against your property.
Debt consolidation loans: Using a secured loan to combine multiple debts into one, leaving you with a single monthly repayment. Unsecured debt consolidation loans are also available.
Logbook loans: Loans secured against your car, where the lender can take ownership if you don’t repay.
Pawnbroking loans: Short-term borrowing secured against valuables like jewellery or antiques, usually with high interest rates.
Why do people choose secured loans?
Secured and unsecured borrowing (like personal loans) both involve borrowing money and paying it back over time. The big difference is whether your loan is linked to something you own, like your home. That one detail can affect how much you can borrow, how much it costs and how much risk you’re taking on.
Some potentially attractive features of secured loans are:
You can usually borrow more than with a personal loan.
Repayment terms tend to be longer than with uncensored borrowing, which can lower your monthly payments.
It may be easier to get approved for the loan than with unsecured borrowing. This may be handy in some circumstances, such as if your credit history is not perfect, or if you are self-employed.
Here’s a comparison to help put things into perspective:
Secured vs unsecured borrowing | ||
Feature | Secured loan | Unsecured loan |
Security required | Yes, usually your home | No |
Borrowing limits | Typically higher | Usually lower |
Interest rates | Often lower | Often higher |
Risk to assets | Your asset could be repossessed | No asset at risk |
Approval criteria | May be easier to get approved for a secured loan if you have poor credit | Stricter credit checks |
What are the risks of secured borrowing?
Secured loans come with some serious potential downsides. In particular, if you don’t keep up with your repayments, the lender can take steps to recover what you owe.
Here’s a summary of the main risks of taking out a secured loan:
Your home could be at risk
If you fall behind on repayments and cannot agree a solution with your lender, they have the legal right to recover the debt using your property. In the worst case, that could include repossessing and selling your property. It won’t happen overnight, but it’s a real possibility.
You could pay more in the long run
Lower monthly payments can look attractive, but stretching repayments over many years means you’ll pay more interest over time. So while it might feel manageable month to month, the total cost of the loan could be much higher.
Interest rates may change
Some secured loans come with variable interest rates. If interest rates rise, your repayments could increase too, which could put pressure on your budget.
Fees and charges can add up
There may be arrangement fees, valuation costs, or early repayment charges if you decide to pay off the loan sooner than planned.
Your credit score could be affected
As with unsecured loans, missing payments or defaulting on a secured loan will likely have a detrimental effect on your credit score. It may stay on your credit report for years, making future borrowing harder.
How can I manage the risks of secured borrowing?
Here are some practical ways to stay in control of your secured loan:
Be realistic about affordability: Before applying, take a close look at your finances, not just today but how things might change. Could you still afford repayments if your bills increased or your income dropped?
Borrow only what you need: It can be tempting to borrow more when it’s available, but that increases both your repayments and the total interest you will pay. Stick to what you actually need.
Understand your interest rate: Check whether your rate is fixed or variable. If it’s variable, make sure you could cope with potential increases in monthly payments.
Build repayments into a wider monthly budget: If you don’t already have a monthly budget for your income and outgoings, now is a good time to create one. Use a tool like the Money Helper budget planner to check that your loan repayments are affordable.
Act early if you’re struggling with repayments: If you think you might miss a payment, don’t ignore it. Lenders are often more willing to help if you speak to them early. You may be able to agree on a temporary arrangement before things escalate.
Is secured borrowing right for you?
There is no one-size-fits-all answer. Secured loans can be useful in the right circumstances, especially if you need to borrow a larger amount over a longer period. But they are not a decision to rush.
The key is understanding both the benefits and the risks and making sure the loan fits comfortably within your financial plans. With a clear plan and a realistic budget, secured borrowing can be a manageable option rather than a risky one.