Two loan options are available to the borrower. The first type of loan is based on your history of money management and credit score, while the second type is based on security put up for it.

The latter is known as a secured loan, and a home owner usually puts up his home as collateral. Home or car loans are good examples of secured loans. The loan is tied directly to the item purchased.

Advantages of a secured loan:

Low interest rates
A secured loan (also known as an assured loan or self cert loan) offers lower interest rates than an unsecured loan. The bank shows confidence in the contract because a physical item is at stake. They have something to fall back on should you not be able to complete the payment term. If you stopped making payments, the bank will issue a warning and an opportunity to fix the situation. Failing compliance on your part, the bank has the right to repossess the asset put up as security for the loan.

You may find this a scary scenario, but a secured loan is set up to offer security for all parties involved. If you fail to make payments, you could end up with a bad credit record, or lose your house, in a worst-case scenario. However, this same deal offers you lower interest rates, which in the end saves you money. For instance, a credit card’s interest rate could well exceed 20 per cent, while a car could be as low as ten per cent and a mortgage even lower.

Easy approval
Because of the considerably large asset you put on the line, the bank feels more secure about the loan. If you fail to meet the required payments, the bank has something to fall back on. This means that they will easily approve the deal because of the collateral.

If you find it difficult to obtain a personal loan or credit card, you may perhaps have a lot less trouble in being approved for a car loan. Even with a bad credit record, banks are usually willing to lend against collateral.