Borrowing against something you own

Some loans are linked to your home, your car or a valuable item. That item is called security, or collateral.

A secured loan may cost less than an unsecured one, or let you borrow more. In return, the lender can take the item and sell it if the payments stop.

These notes explain the common kinds in the UK, so you can understand what you are agreeing to and what to check before you sign.

What security means

A lender with security has the right to take back and sell the thing you pledged if you do not keep up the payments.

Because the lender carries less risk, a secured loan may cost less than an unsecured one. People may also be able to borrow more, or borrow with a poor credit history. The price of that is the risk to the thing you put up.

Loans secured on your home

A mortgage is secured on the property it buys. You can also borrow more against your home later. This may be called a second mortgage, a second charge or a further charge.

Every loan secured on your home gives the lender a right to repossess it. In England a lender cannot do this without first going to court. If the home is sold, the money is shared among the secured lenders in the order the loans were made.

Secured loans often carry legal, valuation and other fees. They are often sold as a way to combine other debts. StepChange recommends getting free debt advice before you secure those debts on your home.

Cars and goods on hire purchase

On hire purchase you do not own the goods until you have paid in full. You must not sell them without the lender's permission.

The lender usually needs a court order to take the goods back. Once you have paid a third of the total, it needs one. Before that, it does not.

You can end the agreement in writing and return the goods at any time. If you have paid less than half the total price, you may still owe some money.

Logbook loans

A logbook loan uses your vehicle as security. You sign a loan agreement and a separate bill of sale. The bill of sale makes the lender the legal owner of the vehicle until the last payment.

If you fall behind, you get a default notice giving you 14 days to catch up. After the account defaults, the lender can take the vehicle without going to court. If it sells for less than you owe, you pay the difference. Bills of sale are not valid under Scottish law.

Pawnbroking

A pawnbroker lends money against goods you leave with them.

The pawnbroker must keep the goods for at least six months. You can collect them at any time by repaying the loan and interest. If you do not, they can sell the goods to clear the debt.

When someone else stands behind the loan

A guarantor agrees to repay a loan if the borrower cannot. If the borrower stops paying, the lender can ask the guarantor for the money. A guarantor who secured the loan on their own home could put that home at risk.

A lender to a business may ask the owner for a personal guarantee. The government's Growth Guarantee Scheme also involves a guarantee, but that one is given to the lender. The business borrowing stays fully liable for the debt. Lenders in the scheme may still ask for personal guarantees, but they cannot take a main home as security.

If payments get hard

Mortgage, secured loan and hire purchase payments count as priority debts. Missing them can cost you your home or your goods.

Talk to the lender early. The government's Housing Loss Prevention Advice Service gives free legal advice if you get written notice to leave your home. StepChange and National Debtline give free debt advice. If a lender treats you unfairly, complain to it first, then to the Financial Ombudsman Service.