Secured debt consolidation loans

What is a secured debt consolidation loan?

A secured debt consolidation loan is borrowing that is tied to your property. It is usually arranged as a second-charge loan, sometimes called a homeowner loan, which sits behind your existing mortgage. The lender registers a charge against your home, meaning the property is used as security for the debt. If you fail to keep up repayments, the lender can ultimately seek possession of your home to recover what it is owed.

Because the loan is backed by an asset, lenders may offer larger amounts, longer terms or a lower interest rate than they would on an unsecured debt consolidation loan. That can make the monthly payment look attractive. But the lower figure and the repossession risk are two sides of the same coin: the price of the lower rate is that your home is on the line. Our guide to secured versus unsecured debt consolidation compares them directly.

How does a secured consolidation loan work?

The process is more involved than an unsecured loan because the lender is taking a legal interest in your home. In broad terms it runs through four stages.

What does turning unsecured debt into secured debt really mean?

This is the single most important thing to understand about a secured consolidation loan, and it is easy to miss. Credit cards, store cards, overdrafts and personal loans are unsecured: painful to fall behind on, but not directly tied to your home. When you consolidate them with a secured loan, you move that borrowing onto your property. Debt that could never, by itself, have cost you your home now can.

Even if the monthly payment falls and the rate looks lower, you are taking on a more serious kind of risk. A temporary drop in income, illness, redundancy, a change in circumstances, that might once have meant a missed card payment could now threaten your home. That is why free, impartial advice matters before you decide. Our guide on when to seek free debt advice explains where to turn.

What happens if you fall behind on a secured loan?

Missing payments on any loan is serious, but on a secured loan the consequences reach your home. A lender will usually contact you first and may agree a way to get back on track, so telling them early if you are struggling is far better than going quiet. If the arrears are not resolved, the lender can apply to the court for possession of the property.

Repossession is treated as a last resort, and a court will look at whether a repayment arrangement is realistic before granting it, but the risk is real and it is the defining feature of this kind of borrowing. If your home is sold to clear the debt, your mortgage lender is paid first and the secured loan lender afterwards from whatever is left. The lesson is simple: only take a secured loan if you are confident the payments will stay affordable through a rough patch, not just a good month.

Amounts, terms and the total cost

Secured loans often run over much longer terms than unsecured ones, sometimes stretching repayment over many years. A longer term lowers the monthly payment, which is part of the appeal, but it also means you pay interest for far longer. It is entirely possible to secure a loan at a lower rate than your credit cards and still pay more in total, simply because you are borrowing for so much longer.

Secured borrowing can also carry arrangement, valuation or broker fees that eat into any saving. Always compare the total amount repayable across the full term, not the monthly figure alone, and factor in every fee. The figures above are an illustrative example of how the trade-offs behave, not a quote.

Who a secured loan might suit

• Homeowners with meaningful equity who have thought carefully about the repossession risk and judged it acceptable.
• People who cannot access enough unsecured borrowing to consolidate but have a stable, reliable income to support the repayments.
• Borrowers who understand that a lower rate over a longer term can still cost more overall, and have compared the total repayable.

If this describes you, the homeowner debt consolidation loans page looks at the options from a property owner's point of view, including how equity works.

Who should avoid a secured consolidation loan?

• Anyone whose income is uncertain or whose budget is already stretched. The consequences of falling behind are far more serious than with unsecured debt.
• People who could consolidate perfectly well with an unsecured loan and have no need to risk their home.
• Those drawn only to the lower monthly payment, without weighing the longer term, the extra interest and the charge over their property.
• Anyone in difficulty who has not yet taken free debt advice, which may reveal better options such as those on our alternatives to debt consolidation page.

Frequently asked questions