A secured loan is borrowing that is backed by an asset, often your home. This can make larger loans possible, but it also increases risk. If you fail to keep up with repayments, the asset used as security may be at risk. For homeowners, secured loans are often described as homeowner loans or second charge mortgages.
What is a secured loan?
A secured loan is a loan where the lender has legal security over an asset. In the UK consumer market, this commonly means a loan secured against a property. It may sit behind your main mortgage as a second charge, meaning your original mortgage lender is paid first if the property is sold after serious arrears.
Because the lender has security, secured loans may offer larger borrowing amounts or longer terms than unsecured personal loans. However, this does not make them safer for the borrower. The risk is higher because missed payments could ultimately put your home at risk.
Why do people use secured loans?
Secured loans are often used for home improvements, large purchases, business purposes or debt consolidation. Some borrowers use them when they do not want to remortgage their main mortgage, perhaps because their current mortgage rate is low or an early repayment charge applies.
They may also be considered when an unsecured personal loan is not large enough. However, borrowing more simply because it is available can create long-term financial pressure.
Secured loan vs remortgage
A remortgage replaces your existing mortgage deal, while a secured loan usually sits alongside it. If your main mortgage has a very competitive rate, remortgaging the whole balance to release extra funds may be expensive. In that case, a secured loan might be considered for the additional borrowing only.
However, secured loans can have higher interest rates than main mortgages, and you may have two monthly payments to manage. You should compare total costs, fees, term length and flexibility.
Eligibility and affordability
Lenders usually look at property value, outstanding mortgage balance, available equity, income, credit history and monthly spending. Equity is the difference between your property value and the amount owed on mortgages or secured borrowing.
Even if you have strong equity, the lender must still consider affordability. A secured loan should not be approved simply because there is property value available.
Costs and fees
Secured loan costs can include interest, arrangement fees, broker fees, valuation fees and legal or admin costs. Some fees may be added to the loan, but this means you may pay interest on them over the term.
Always check the total amount repayable. A long-term secured loan may have a manageable monthly payment but a high total cost over time.
Risks of secured borrowing
- Your home may be at risk if repayments are not maintained.
- Long terms can increase total interest.
- Debt consolidation can be risky if you build new unsecured debts afterwards.
- Variable rates may increase payments.
- Fees can make the loan more expensive than expected.
Using a secured loan for debt consolidation
Debt consolidation means combining several debts into one repayment. A secured loan may reduce monthly payments by spreading borrowing over a longer term, but it can increase total interest and convert unsecured debts into debt secured against your home.
This is a major decision. If you are consolidating debts because monthly payments are unaffordable, seek debt advice before securing those debts against your property.
Questions to ask before applying
- Do I need to borrow this amount?
- Can I afford repayments if income falls or costs rise?
- What is the total amount repayable?
- Are there early repayment charges?
- What happens if I miss payments?
- Is remortgaging, saving up or delaying the purchase a better option?
Frequently asked questions
Is a secured loan the same as a mortgage?
It is not the same as your main mortgage, but it can be secured against your home in a similar way, often as a second charge.
Can I get a secured loan with bad credit?
Some lenders may consider adverse credit, but rates may be higher and affordability checks still apply.
How much can I borrow?
This depends on income, credit profile, property value, existing mortgage balance and lender criteria.
Can I repay a secured loan early?
Possibly, but early repayment charges may apply. Check the agreement before signing.
Final thoughts
A secured loan can be useful in the right circumstances, but it should never be treated casually. The key question is not only whether you can borrow, but whether the borrowing is worth the risk of securing it against your home.
Disclaimer: This article is for general information only and does not constitute financial, mortgage or debt advice. Your home may be repossessed if you do not keep up repayments on a mortgage or other loan secured on it.