Getting a personal loan can be very useful when trying to spread the cost of an expensive purchase such as a new car, home improvement or paying for a holiday. However, you will still require a good credit rating to be accepted for borrowing, as the lender has to establish how creditworthy you are.
If you have a bad credit score, you might find that your options for borrowing are restricted. One option might be to take out a secured loan, rather than an unsecured loan, meaning that the loan amount is secured against an asset you already own such as a car or your home.
What is a secured loan?
A secured loan is an agreed amount of money that is linked to an asset you own, normally your home. This means that if you fail to repay the loan for any reason, the lender can reclaim the amount by taking possession of the asset, thereby reducing the risk for the lender.
This is sometimes an option if you have a bad credit rating, or even if you would like to borrow a large amount of money. Since the risk is reduced for the lender, you have a higher chance of being accepted for the loan, but there is still a heightened risk for you if you start to fall behind on monthly repayments.
How can I spend my secured loan?
Just like an unsecured loan, you are welcome to spend your secured loan on anything you wish, though the lender might ask you what your plans are prior to lending you the money. Most commonly, the amount will be used to make a significant purchase, or used in an attempt to clear any existing debt.
The large amount could even be used to afford several significant purchases including:
- Buying a new car
- Making a home improvement
- Paying for a large wedding
- Financing a holiday
- Going into full-time education
- Purchasing home appliances
Is a secured loan right for me?
While a secured loan is a viable option for those who would like to borrow a larger amount than usual, it also puts a huge amount of risk on you as the borrower. Since you usually have to secure the loan amount against your home, it means that if you fail to repay the loan you will have your home taken off you as a result.
Unfortunately, a secured loan might be the only option available to you if you have a bad credit rating. You should be very careful in considering this option given the substantial risk in losing your home (or equivalent asset), but if you are confident you can make all the monthly repayments and are happy with the terms of the secured loan, then it might be the right option for you.
Advantages of a secured loan
- You can borrow a larger amount of money than an unsecured loan
- There is a chance you can still be accepted with a bad credit rating
- The loan can be used for debt consolidation
Disadvantages of a secured loan
- There is a risk that you can lose your home
- Repayments can be expensive