Secured loans may prove to be a cost-effective way of borrowing money.

Here’s how they typically work and the logic behind them:

• before lending money, a typical lender will wish to understand something of the risks they face in doing so – that involves things such as looking at your credit history, trying to understand the purpose of the loan and taking into account your income and ability to repay the amount you’re asking to borrow etc;
• anything that results in a reduction of perceived risk for the insurer may typically result in a reduction in the amount of money you’ll have to pay for the borrowing in interest terms;
• one way of reducing the risk to a potential lender and thereby typically obtain a lower interest rate, is to offer security against the amount;
• security means that you offer one of your assets (typically property but sometimes things such as cars etc) as a form of guarantee that you will keep up repayments in line with the loan agreement;
• loans advanced under security are called, unsurprisingly, secured loans;
• the security works simply – if you fail to repay the amount the lender has a legal right to force the sale of the asset in order to recover their money;
• providing you keep up repayments, your asset is perfectly safe and cannot be touched;
• secured loans may be easier to obtain and more attractive in interest rate terms than unsecured loans – in fact, it may be difficult to obtain loans for larger amounts on an unsecured basis;
• unsecured loans may typically require a higher degree of clean credit history than those that are secured;
• if you search for a cheap secured loan, remember to read the terms and conditions thoroughly – what is cheap for someone else may not prove to be either cheap or suitable for you;
• in order for an asset to be acceptable to lender, you typically will need to own it or have sufficient equity (the amount left after you deduct any existing loans secured against it) in it to guarantee the amount you are borrowing;
• it may be perfectly possible to use a property that is jointly owned as security, providing the other owner is willing to legally support your use of the asset as a loan guarantee;
• if you use your home as a security for secured loans, remember that it may be at risk if you fail to keep up repayments in accordance with the loan agreement contract you will have signed.