Borrowing is a part of life. Most people normally borrow loans to buy a car, house, go on vacation or pay tuition fees for their kids. Anyone who has a reliable source of income can apply for a loan and have their application approved. This is because financial institutions are only interested in the applicant’s ability to repay the loan without default.

Types of Loans

There are basically two types of loans that UK residents can apply for. These are secured loans and unsecured loans. The former refers to a type of loan that is offered against a physical marketable security, such as a car, house, stock certificates, or a fixed deposit account. The loan is secured because the lender has a guarantee that in case of default, they can sell the asset to recover their funds. This makes secured loans attractive to lenders because their risk is minimized. With unsecured loans, the lender offers a loan to the applicant based on their income, usually a salary. This is the most popular type of loan for employees.

Once the loan is approved, the lender places a standing order on the salary account of the borrower. At the end of every month, the monthly instalment is deducted before the borrower can access the funds. Cash advances and payday loans can also be considered personal unsecured loans, albeit short-term.

Getting a Secured Loan

If you need a large loan to buy a car, pay university tuition fees for a child or to pay a deposit for a rental property that you intend to acquire as an investment, you may want to consider applying for a secured loan against your home. If you already have a mortgage that you have been servicing for several years, you can borrow against the equity you have built over the years.

For instance, if the market value of your home is £200,000 and you have a £70,000 mortgage balance, you can use the £130,000 equity as collateral for the secured loan. This is also the maximum loan limit for the loan, so you cannot borrow a loan exceeding £130,000. This is what is normally referred to as the second charge mortgage, which must be registered with the land registry.

Since mortgages normally come with long repayment periods, typically 5-25 years, the monthly loan payments are usually low. This is one of the reasons why mortgages are incredibly popular with UK property owners. The second reason is that loan amounts are usually quite considerable. Aside from making major purchases, such as buying a car or a second home, second charge mortgages can also be used for debt consolidation. If you have several personal loans and credit card debts that come with high interest rates, you can apply for a second charge mortgage and use the money to settle these debts in a bid to regain control over your personal finances.

The Pros and Cons of Borrowing

There are some people who claim that borrowing is an unnecessary and costly vice that most people have become accustomed to. These people claim that people should learn to save for major expenses as opposed to borrowing whenever they want to buy something. While this argument makes sense, you cannot plan out everything in life.

For instance, if your car is stolen and your insurance policy does not cover theft, you cannot wait several months or years to save money to buy a new car. After all, you normally use the vehicle on a daily basis to take kids to school and go to work. A more reasonable option would be to take out a loan to buy a car that meets your needs and continue to service the loan over time.

The Effect of Credit Scores on Borrowing

There is a common misconception that a poor credit score would deny you a loan. The truth is that credit scores are only used to calculate interest rates as well as loan limits and repayment periods. If you have a poor credit history, any credit officer at a bank or building society would still invite you to apply for a loan.

After checking how high your monthly income is as well as how you handle your finances, the credit officer will approve your loan application. However, they will quote a higher interest rate.  They may also reduce the repayment period as well as the loan amount. That said, do not let a poor credit history stop you from applying for a loan.