We often read about how easy it is to get hold of credit these days. You can’t open a newspaper or watch daytime TV without being bombarded with adverts for credit that will entitle you to a world of pleasures and treats. You’ve no doubt heard about the “homeowner loans” that form the majority of such promotions, and perhaps you’re thinking of taking one out but need a little more information. This brief guide will give you the basics before you go looking for your first loans quote.

There are many kinds of personal loan, but they can generally be divided into two main categories: secured and unsecured.

An unsecured loan is given on the basis of a person’s income, credit rating and other factors that can be used to determine the applicant’s creditworthiness. The loan is not backed up with any kind of collateral, so if the borrower defaults, the lender risks losing its money or faces the inconvenience of chasing the defaulter through the courts. Often, a third party (a guarantor) will need to sign the loan application form and will be obliged to pay up any outstanding balances should the borrower become unable or unwilling to pay. As a result of this risk, unsecured loans are generally more expensive than secured loans, in terms interest rates, charges and penalties.

The second type is secured personal loans. This type of loan is open mainly to people with a self-owned home or a mortgage, and it is this home that will be the collateral used to repay the lender should the repayment obligations not be met. In some cases, items of value other than a home will be accepted as collateral, but since a home is most people’s most valuable asset, and because it can’t be “spirited away”, it is by far the most preferred option.

Because secured personal loans have the borrower’s signature on a contract stipulating that the amount repayable plus recovery expenses is covered by the property, this type of product can be considered by the lender to be as close to zero risk as is likely to be possible. The cost of any loan is closely linked with the risk, so therefore secured loans are much cheaper than unsecured ones. Of course, the usual credit checks will still be performed, but because of this guarantee to the lender, the bar will be set a lot lower.

All secured personal loan adverts come with a health warning, namely that “Your home could be at risk if you do not keep up repayments”. Whilst this fact should certainly be borne in mind when deciding whether you can afford to repay the loan, it needs to be balanced against the huge financial advantages that can be brought be the loan as opposed to an unsecured loan. With care and common sense, secured loans are a great way of getting credit.