In the UK, the cost of borrowing money is at its lowest level in a few years. The Bank of England has stabilised interest rates at a low lending rate, which makes it possible for people to get loans and credit agreements that are all very affordable. Even though people have more debt than ever before, there is a growing sense across the country that people are getting used to how much debt they have.
Now is a good time to borrow money for home improvements or a new car, since loans are becoming easier to get through the Internet and specialty loan companies are more willing to work with people who have bad credit. But since there are many different kinds of loans, how do you choose the right one for your needs?
Possible loans
What you want to do with the money will largely determine what kind of loan you get. Lenders now offer loans that can be used for a wide range of things. So, if you want to buy a new kitchen appliance, finance the purchase of a motorcycle, or buy a vacation home, you can be sure there's a loan for that.
No matter what kind of loan you get, you'll find that it falls into one of two broad categories: unsecured loans or secured loans. Unsecured loans let people borrow money up to a certain limit, which is usually GBP25,000, without putting up any kind of collateral to be used as a guarantee for the loan. A secured loan, on the other hand, requires you to put up collateral against the amount you want to borrow. You can borrow up to GBP25,000 with a secured loan.
Why does a secured loan need collateral?
A secured loan is one where the money is given to the borrower on the promise that if the borrower doesn't pay back the loan, the lender can take legal control of the collateral in order to get the money back. If you wanted to borrow GBP100,000, for example, the loans company would want you to put up something with a resale value of at least GBP100,000 as collateral. For most people, this would be their home or the value of their home if the loan is a second mortgage or is in addition to a first mortgage.
So, the only real limit to how much you can borrow with a secured loan is how much collateral you can offer the lender. If you don't pay back a secured loan, the lender will take legal ownership of the thing you put up as collateral and sell it. Lenders will only want to get back the money they are owed, no matter how much the collateral is worth on the open market. Because of this, high-value things like homes and cars can be found at lower prices at liquidation auctions.
