With various ways to borrow, it can be easy to overlook certain options that we are unfamiliar with. Perhaps you have never required a particular type of credit or your circumstances up until now have meant you’ve had little need to borrow. Alternatively, you might just not understand how a loan or credit service could work for you. While you might become comfortable using a particular service, you should never stop looking around in case there are better options available. In the same way you should never auto-renew your car insurance without running a comparison first, using a different type of credit from time to time might save you money, and this is true for all types of credit – from credit cards to mortgages to credit lines.
Secured borrowing is a common type of loan which comes in various forms. Mortgages are one of the most common types of secured borrowing though people often don’t make the association because of the different terminology. As well as mortgages, secured borrowing might include:
Some people may rely heavily on borrowing this way, whereas others may have never considered it as an option before. But there are advantages to secured borrowing and it can be an alternative way to borrow if you’re struggling to find credit options elsewhere.
Like a guarantor loan, a secured loan provides a secondary source of payment if you, as the debtor, fail to make the agreed repayments on time or in full. Instead of the lender relying on the guarantor for repayment if you are unable to pay, they rely on the security. This means the lender is less likely to lose money, as they can realise the security they hold against your loan to cover their losses. However, selling your assets is typically a last resort option for lenders because it costs them money to process, it can give them a bad reputation and potential customers may be discouraged from using their services if they feel the collateral has been repossessed unfairly.
Typically, these types of loans are secured against your home, even if you’re not taking out a mortgage, but lenders may consider other assets of high value as well. Lenders will usually only accept security that is valued much greater than the loan principal because of the costs involved in realising the asset. This is why it’s common to secure a loan against your house, even if your house is worth £250,000 and your loan is only worth £20,000. It’s important to note that in most cases, a lender would have to gain approval from your mortgage provider and any other creditor who holds equity in your property before they can start asset realisation or repossession.
Secured borrowing works in a similar way to most other types of credit. Once you’ve chosen a lender, you will need to submit an application. The applications will likely vary depending on the size of the loan and its purpose. For example, a mortgage application can take days to review, whereas a pawnshop loan may take a few minutes or hours. You will be required to pledge the security via a legal document. In many cases, you will retain possession of the asset for the duration of the loan term, but in some cases, like with a pawnshop loan, you will be expected to give the collateral to the lender, which will be returned upon your final instalment. The lenders still have to assess your application even though you are providing security as they still have an obligation to lend responsibly. Applying for any type of secured credit usually takes much longer than applying for unsecured credit like an instant loan.
Lenders who provide secured loans can often service a wider demographic as the collateral mitigates the various risks involved in lending. This means that secured creditors can consider people with a poor credit score or a thin credit history. They may also offer lower interest rates, so your borrowing is cheaper. However, a secured loan, like any type of credit, is only going to help you if you can afford the repayments. This is because, while the loan may solve your short term cashflow issue, missing your repayments can cause serious money problems and make credit harder to obtain in the future. While the lender will conduct affordability and creditworthiness assessments prior to giving you the loan, they will also rely on your application being honest.
Finding an alternative to secured loans will depend on your circumstances and how much you are looking to borrow. If you need a large sum of money in the thousands, then a bank loan or high credit limit credit card may be an alternative borrowing option to secured lending. However, these types of credit usually require a good credit history; if you know your credit score is not brilliant and you are intending to make a large purchase in the future, you may want to look at ways to improve your credit score now, so you are better positioned to apply for mainstream unsecured borrowing when you need it.
If you are looking to get a small loan with bad credit, guarantor loans might be a suitable alternative to secured borrowing, or, if you don’t want to provide a secondary source of repayment, then a credit line could be another option to consider, as they are quick to process and accessible.
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