There are two main types of loans - secured loans, and unsecured loans. The secured loan is one in which you offer some type of collateral in exchange for the opportunity to borrow a large amount of money. In most cases, the collateral is your home (and, of course, the most common type of secured loan is a mortgage which uses as collateral the home that the borrower is using the loan to buy).
The Pros and Cons of Secured Loans
The biggest disadvantage of a secured loan is a fairly obvious one: if you are unable to repay the loan, the lender can seize the property that you offered as collateral. If you secure the loan with your house (as is the case when you take out a mortgage), defaulting on the loan means you risk losing your home.
The main advantage to you is that lenders consider this type of loan to be less risky, because the risk of losing your collateral means you are less likely to default on loan payments (and because if you do default on payments, the lender can make most of their money back by seizing your collateral). This is an advantage to the borrower simply because lenders charge lower interest on secured loans, because their risk is lower.
Another advantage of a secured loan is that you can borrow much larger sums than you can through an unsecured loan. Most lenders will not lend more than £25,000 to any borrower that does not offer some sort of collateral. If you need to borrow a large sum of money, generally the only way to do so is to offer your house as collateral.
Why Get a Secured Loan?
The obvious reason for taking out a secured loan is when you are using the money to buy a house. In this case, you're taking out a mortgage, and the collateral is the house you're buying.
There are, however, other situations in which you may want to take out a secured loan. For example, you may want to borrow more than £25,000, and few lenders will offer a sum larger than this without some sort of collateral. If you borrow using your house as collateral, you can generally borrow a much larger sum - up the appraised value of your home, depending on how much equity you own.
Another reason you may want a secured loan is if your credit rating or income to debt ratio is not good enough to qualify for an unsecured loan. Lenders tend to have much stricter qualifying criteria for unsecured loans (because they are higher risk to the lender), so if your credit history and income to debt ratio is less than stellar, a secured loan may be your best option.
Finally, a secured loan is generally available at a lower interest rate (unless your qualifying criteria are poor - if this is the case you may have to settle for a bad credit loan, which will incur a higher interest rate even if you offer collateral). Overall, the loan will cost you less if you use personal assets as collateral, so it's a better option if you want to borrow the money as inexpensively as possible.