The 2 Basic Types of Loans
Jul 7, 2009 Mortgages
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When you begin looking into personal financing options you’ll quickly learn that there are different ways to borrow cash for all sorts of things that you need money for. The two general kinds of loans are often categorized as “secured” and “unsecured” loans.
Unsecured loans are good for smaller purchases which you can pay off quickly. Even store credit cards are good to use in some cases because the credit limits are small and the introductory interest rates are often decent. Unsecured loans are loans which are given to you based on your credit score and not based on any single thing you offer up for collateral. Your credit score is really a measure of your expected ability to pay off debts. If you have always paid your bills on time then you probably have a pretty good credit rating. Most credit cards are actually considered to be an unsecured type of financing.
Secured loans are a type of loan in which the lending institution has some sort of collateral or item which you own to hold until you pay off the loan. When you finance a motorcycle or buy a house with a mortgage the bank technically owns what you bought until you’ve paid off the loan amount with interest. If you default on your loan then the lending institution can take your collateral and auction it in an effort to regain some of the money you borrowed.
Secured financing such as home equity lines of credit generally have a lower interest rate, which makes paying them off easier over the life of the loan. There is often more paperwork associated with secured loans because they are so much bigger than most unsecured loans. Depending on your tax situation you may even be able to lower the yearly income tax that you owe. Common secured loans include home mortgages, new auto loans and many larger house remodeling financing options.
Many costly projects are changed when people finally begin to consider how various loans work. Be smart and make sure you can really afford the monthly payments before you apply for your loan. No matter what type of loan you consider remember that you do have to pay the money back and you will be paying interest on the money that is owed.
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Tags: Banks, borrowing, finances, financing, loans, money, Mortgages, Secured Loan, Unsecured Loan
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