When getting a new loan, one of the most basic choices is between a secured loan and an unsecured loan. Before we talk about the pros and cons, you should know that a secured loan means that if you can't pay back the loan, the lender can use agreed-upon security, like your home or car, to pay off the loan.
This is the biggest problem with secured loans, Most of the time, the asset they are backed by is very important to the borrower. Most people's homes and cars are the two things they value the most and are the least willing to give up. Whether or not you have a mortgage on your home, it can be used as security. The amount of the loan will also depend on the value of the asset, among other things. For example, if your home is worth GBP50,000, a lender is very unlikely to give you a GBP60,000 loan. At the same time, just because you have valuable assets to back up the loan doesn't mean the lender will give you the full value of the asset. Your income, the amount of debt you already have, and your ability to pay back the loan will also be important.
Secured loans can be used for anything, but most people use them to pay off debt or make improvements to their homes. But because the loan is backed by your home, many short-term uses aren't a good idea. It might make sense to borrow against your home to pay for home improvements, but it wouldn't make sense to borrow against your home to buy groceries and pay your bills.
Secured loans are likely to have better terms and rates, and they might also be bigger than unsecured loans. Because the lender is taking on less risk, he should be more willing to give you a lower interest rate on a secured loan. If you don't pay back the loan, he can move in and sell the house. He is almost certain to not lose the money he lends you because of this. If the loan isn't secured, it's a lot riskier because if you go bankrupt, he might not get anything back. Even though these things don't happen very often, and we hope they won't, they are the main way that interest rates are set.
For the same reasons, lenders will usually be more willing to lend if there is something to back up the loan. So, if you can't get unsecured credit, you could try secured credit as an alternative.
