Secured and Unsecured Borrowing: Everything You Need to Know

Secured loans are taken out and borrowed against an asset you own. This could be your house, for example.

But, many of us are still in the dark about the ins and outs. Is it a riskier option? What’s the situation with interest rates?

What happens if you can’t keep up with payments?

Let’s take a look.

Secured loans meaning

Secured loans have different types and are also known as homeowner loans, debt consolidation loans or first/second charge mortgages. Bridging loans are also secured.

Lenders will require a level of security in case you can’t pay the loan back, hence the ‘secured’.

They’re usually for homeowners with a mortgage where there is enough equity in the property to borrow a lump sum against.

People typically use secured loan borrowing to pay for property renovations or home improvements, car purchases or debt consolidation.

How much can you borrow?

The amount you can borrow depends on how much equity there is in your home. The security the lender takes against a loan is your home, so if you default on your payments, your home could be at risk. This is the most important point to understand about secured loans and what you’re agreeing to.

Loan amounts are typically larger amounts above £10,000 although they can start at £5,000.

Some lenders will lend against 100% of your property value (and some even above) because your home is the security!

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Advantages and disadvantages of secured loans on a property

As with anything, there are some clear pros and cons.

Advantages

• They are available to more people, including those with a poor credit history
• They can be used for a range of purposes, including debt consolidation
• Lower monthly repayments can ease the strain on your finances
• You can borrow higher amounts, depending on your circumstances
• Repayments are normally paid each month
• Interest rates are often lower than personal loans (though bear in mind this is because you’re securing it against your home)

Disadvantages

• Your home will be at risk if you do not keep up with repayments
• You may pay more in the end, especially if you choose a lengthy repayment term
• Lenders will limit that you can borrow against the equity in your property so you might not be able to borrow as much as you want
• Interest rates can increase, ensure you know if yours is fixed or variable

First and second charge mortgages

Both of these can be taken out for the same reason, for example home improvement.

So, what’s the difference?

First charge

These are mortgages taken out when you have no current existing mortgage. 

Second charge

These are taken out when you already have a mortgage. This could be a separate agreement with your current lender, or a new one with a different lender.

Further mortgage advance

Another option is to get an advance on your mortgage. Many borrow more from their lenders if they’re saving for a deposit for a second home, for example. 

Is secured borrowing always for a home?

It’s important to note that it’s not only your home that you might want to secure a loan, this is just the most common option.

For example, it could be your car, or a valuable possession, such as jewellery. 

Another option is to have a guarantor. This is where you take out a loan and someone else agrees to repay it if you can’t, such as a family member or friend. 

What is an unsecured loan? 

With unsecured loans, you borrow a certain amount of money and make regular repayments until it’s fully paid off. There’s no ‘security blanket’ e.g. your house.

While this might sound more appealing on the surface, there are some inevitable downsides, such as:

1. Failure to pay can damage your credit rating
2. If you have a poor credit rating already, you may not be able take one out at all
3. Interest rates are often higher
4. Lenders can take you to court if you fail to pay, which could include applying for a charging order on your property

Worried about your credit rating? Get a free Experian credit rating check to get a good understanding of your situation.

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Secured borrowing – considerations to make 

Before taking out a secured loan, here are some things you need to be aware of:

• You may not get the interest rate displayed (often the one you receive is higher than the one advertised)
• Ensure you’ve considered whether you’ll struggle to make repayments – your house is up as collateral 
• You’ll pay more interest the longer you make repayments 
• Your home will probably need to be valued to ensure you’re eligible 

Extra COVID-19 related considerations include:

• In order to apply for a secured loan, you must be out of a payment holiday. (This isn’t to say you can’t have taken a payment holiday, but that you have to now be out of it and can evidence that you’ve made at least one payment)
• You can’t be on furlough. If you were previously furloughed, you have to be back on working hours 

For those that meet these two criteria, there are some good lending options available. 

What does the situation with lending currently look like?

Worried about how the pandemic has affected lending? Here’s a note from our supplier:

‘Recently we have seen secured lending showing a prominent recovery, with several lenders releasing product updates and issuing new products since lockdown paused much of the market activity over the last few weeks. The return of lending options, along with the changes to equity levels that lenders are prepared to lend are increasing week on week giving the financial market a positive boost.

There are still plenty of very good lending options out there at rates mirroring pre-lockdown, including rates from 3.57% up to about 29.9%. It is very much ‘rate for risk’, with the typical interest rate being 11.6%. With roughly 50-60% of the products that were on the market pre-Covid-19 now returned and with new products available, the market is returning to what it was at a rapid rate.’ 

How to find a good deal

It’s always a good idea to explore your options in-depth. 

Depending on how much money you want to borrow, you can choose from a range of loans for home improvement projects, including personal, homeowner and bridging loans.

Apply today and find the best home improvement loan rates available from UK lenders – without affecting your credit score.

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Last Updated: January 3rd, 2024